STUC Budget 2007 Submission

STUC February 2007

Executive Summary

The STUC does not underestimate the long-term challenges facing the Scottish economy or the current factors, such as the decline in manufacturing and persistently high levels of economic inactivity that restrict our economic performance. However, this submission seeks to be realistic about Scotland’s current performance which, in terms of jobs and growth, is generally positive.

The STUC makes the following recommendations for Budget 2007:

On productivity, Budget 2007 should:

• Examine ways in which the public sector can develop workplace development programmes along the lines of our European competitors; and
• Extend incentives for R&D investment and examine how these might be applied to wider innovative practices.

On regulation, Budget 2007 should:

• Drop the Government’s arbitrary target driven approach to Better Regulation, instead highlighting the positive role of regulation in a modern knowledge based economy;
• Implement a review of regulatory impact assessments (RIAs); and
• Introduce stronger social partner involvement in designing and implementing regulation, especially in the labour market.

On manufacturing, Budget 2007 should:

• Implement a review, leading to the improvement and simplification, of all business support available to manufacturing enterprises;
• Consider smarter use of the flexibilities in EU procurement law to support indigenous manufacturing;
• Promote strategic use of state aid to help vulnerable companies within Scotland’s priority industry sectors restructure or specialise; and
• Indicate that the state of manufacturing industry will be included in the remit of the Bank of England Monetary Policy Committee when setting UK interest rates – and for the MPC to include people with understanding and experience of industry.

On welfare reform, Budget 2007 should:

• Increase support for the Access to Work programme which provides subsidies to help disabled workers and their employers meet any extra costs that might otherwise act as a barrier to employment.
• Provide a commitment to the future of REMPLOY; and
• Increase employment support for disabled people to the levels of European competitors.

On migrant workers, Budget 2007 should:

• Introduce measures to tackle exploitative employment practices and protect agency workers; and
• Provide funds to improve the basket of services offered to migrant workers to ensure that experiencing decent employment and social conditions is the norm.

On women and work, Budget 2007 should introduce:

• Measures to ensure that public sector bodies pay women workers fairly and address the persistent undervaluation of women’s work, particularly given the need to achieve compliance with the Gender Equality Duty; and
• Measures to support part-time paid leave for carers, similar to the Swedish paid parental leave, which would provide compensation for earnings lost while caring for young children.

On pensions, Budget 2007 should consider:

• Tax relief for pension scheme investments to make final salary schemes, once again, the accepted standard for occupational pension provision;
• Full compensation for victims of all scheme insolvencies retrospectively and not only for those schemes becoming insolvent after May 2005;
• Compulsory contributions from employers and financial assistance through tax relief for individuals earning under £5000 who wish to opt in to the NPSS scheme;
• Equalising the contributions of both the Basic State Pension and the S2P at thirty years to address the potentially discriminatory effect on women.
• Increasing retirement income for poorer pensioners to ensure that the distribution of state pension provision targets those with least income.

On public services, Budget 2007 must:

• Recognise the fundamental role that the pubic sector plays in economic development. An effective UK response to globalisation will be underpinned by a strong public sector employing staff who are motivated and well renumerated.

On energy and the environment, Budget 2007 should

• Provide sufficient funds for effective Carbon Capture and Storage demonstration projects in the North Sea;
• Reduce duty on gas oil in order to safeguard jobs in the coal production sector; and
• Provide additional resources for workplace sustainability programmes.

1 INTRODUCTION

The STUC represents some six hundred and thirty thousand workers across Scotland, the members of our affiliated trade unions.

We speak for trade members and their families in and out of work, in the community and in the workplace. Our affiliated trade unions have interests in all sectors of the economy.

The following submission sets out our current assessment of the Scottish economy, our comments on aspects of the Pre Budget Report (PBR) and some of our key priorities for the 2007 Budget and for Government action generally. The submission is also relevant to the 2007 Comprehensive Spending Review and the wider response to globalisation.

Pre-Budget Report 2006

During his Pre-Budget address on 6 December 2006, the Chancellor described the challenges of globalisation:

“Asia is already out-producing Europe - China alone is manufacturing half the world’s computers, half the world’s clothes and more than half the world’s digital electronics and this Christmas, more than 75% of children’s toys.

“But in the next ten years the competitive challenge is even more profound. Once responsible for just one eighth of the world’s growth, China and India will soon capture almost half.

“And increasingly they are competing not just on low cost, but on high skills. While every year Britain adds 75,000 engineers and computer scientists, India and China add half a million and while annually Britain turns out quarter of a million graduates, India and China now graduate 4 million.

“So economies like ours have no choice but to out-innovate and out-perform competitors by the excellence of our science and education, the quality of infrastructure and environment and by our flexibility and our levels of creativity and entrepreneurship”.

This is a compelling account and certainly there is no disputing the broad thrust of the analysis of the challenges of globalisation and the solutions proposed. However, it remains a partial account. For instance:

• It assumes that rapid growth in India and China will continue unabated thereby ignoring the accumulating evidence that China in particular

faces massive problems in maintaining its growth rate over the next decade and beyond; - Assessing the strengths of the Chinese and Indian economies on the numbers of graduates produced can be misleading. It ignores the fact that only a small proportion are able to contribute meaningfully in the workplace1; - It implies that European economies must accept the downward trajectory in manufacturing – however, last year alone, Germany created a quarter of a million jobs in manufacturing2; - It ignores the key task facing governments in advanced post-industrial economies: how can we find a response to globalisation that creates jobs and growth whilst distributing the proceeds more evenly? Without such a response protectionist pressures in the developed world will continue to grow and developing countries will suffer as a result.

Will Hutton, in his new book3 describes the problem cogently:

“…. simple extrapolations of China’s continued growth at current levels for the next 40 or 50 years are misleading…..it is wrong for so many Western politicians, business leaders and opinion formers to use China as an ominous threat before which the West must change or else wilt. This idea is normally code for the proposition that ordinary Americans and Europeans should accept stagnating living standards, diminished welfare states and fend for themselves, acquiring the educational and skill levels – more and more at their own expense – necessary to compete with China’s advancing hordes. Those in the upper echelons of society, meanwhile, can continue to enjoy the trappings of growing inequality”.

The STUC believes that Scotland is well placed to meet the challenges of globalisation. In many ways, Scotland has coped remarkably well with the massive industrial restructuring over the past three decades. However, current evidence is that we are making insufficient progress towards the creation of an economic and social framework that is wholly fit for purpose. If Scotland’s success in the global economy is to be assured, it is vital that substantial progress is made in achieving the twin aims of raising productivity and reducing inequality.

The following submission suggests some recommendations for helping realise this goal.

2 THE SCOTTISH ECONOMY

The STUC does not underestimate the long-term challenges facing the Scottish economy or the current factors, such as the ongoing decline in

1 “Up to the Job? How India and China risk being stifled by a skills squeeze”, Jo Johnson and Richard McGregor, Financial Times, 20 July 2006

2 Eurostat

3 The Writing on the Wall, Will Hutton, Little and Brown, 2007

manufacturing and the apparently intractable problem of pockets of high economic inactivity, that restrict our economic performance. However, this submission seeks to be realistic about Scotland’s current performance which, in terms of jobs and growth, is generally positive. Recent reports reflect this situation:

• GDP rose by 2.3% over the year to the end of 2006 Q3 and grew by 0.5% over the third quarter of 2006. This compares to UK figures of 2.6% rise over the year and 0.7% over the quarter. Forecasts for growth of the Scottish economy in the current year range from 2 – 2.4% which compares with a range of 2.2 – 2.6% for the UK economy4;
• Royal Bank of Scotland’s Purchasing Managers’ Index5 for January 2007 reported a slowing of output growth, fewer new orders and continuing high input costs. However it concluded that, “The fall in output is not as bad as it looks at first glance. Business activity is still at an elevated level and all sectors of the economy are making a contribution to growth. This provides a solid foundation for future economic performance. The rate of job creation is also encouraging. Higher levels of employment indicate that companies are optimistic about likely trading conditions in the year ahead, and should help strengthen demand in the wider economy”.;
• Bank of Scotland Monthly Labour Market Survey, January 2007, reported that ‘The Scottish Labour market ended 2006 on firm footing with increases in both temporary and permanent employment in December. Growth rates were also stronger than the UK average”.

Of course, the performance of the UK economy is critical to the Scottish economy and therefore, it is encouraging that the recovery in growth that followed the deceleration in 2005 has become well entrenched. The STUC congratulates the Government for its ongoing sound management of the economy.

Despite this generally favourable climate, current orthodoxy has it that the UK is a bad place to do business and that Scotland is somehow worse. Orthodoxies, rooted in the highly selective analysis promoted by employer organisations, some politicians and elements of the media are becoming increasingly ingrained: the public sector is ‘crowding out’ the private sector, businesses are hamstrung by huge levels of new regulation and business taxation is too high.

Is Scotland a difficult place to do business?

The evidence suggests that it is not.

• The UK is ranked 6th out of 175 countries in the World Bank’s Ease of Doing Business rankings6;
• The OECD recently constructed a composite policy indicator of flexibility which ranked the UK the highest among all OECD economies7;
• A recent PricewaterhouseCoopers survey demonstrated that the UK has the 4th lowest ‘total tax burden’ out of 22 OECD countries surveyed and is 5th in terms of the time required to comply with the tax burden8.

These are authoritative reports from credible sources. (Of course, it is helpful to bear in mind that scoring high on ‘ease of doing business’ does not necessarily correlate with high investment, high productivity or economic success).

Conveniently forgetting that the vast bulk of regulation affecting business emanates from Westminster and Brussels, some will claim that these surveys refer to the UK as a whole and that the business environment in Scotland is much less conducive to growth. Proponents of this view argue that the Scottish Parliament is placing additional ‘burdens’ on the business community and/or that the higher public sector to GDP ratio is ‘crowding out’ private sector growth. Evidence to support either proposition is hard to find:

• Total employment in Scotland increased by 175,000 between Q2 1999 and Q2 2006. The public sector accounts for 33.3% of this increase and the private sector accounts for 66.7%. The majority of the growth in public sector employment has been in health and education, areas where there is very limited private sector demand9;
• Public sector employment in Scotland accounted for 23.8% of total employment in 2006 Q2. The comparable figure for the UK was 20.2%10. International evidence shows the proportion of public sector employment in Scotland is relatively average. It is important to note that successful economies such as Sweden, Norway and Denmark all have higher proportions of public sector employment than Scotland – and higher levels of public spending as a proportion of GDP;
• A perusal of all legislation passed by the Scottish Parliament reveals that very little has directly impacted on business. Where it has, the impact should be positive i.e. the Planning Bill. Similarly, there is no credible evidence to support the oft-repeated claim that the Scottish Executive ‘gold-plates’ EU legislation. If representatives of the business community believe that Scottish based regulation is adversely impacting on growth, then they should be specific about what they want to see repealed and why.

The Scottish Labour Market

Overall, the Scottish labour market continues to perform well with employment at historically high levels and Scotland has, to date, avoided the upward trend in unemployment which affected England through 2006. The latest labour market statistics11 reveal that the trend in the employment rate may be starting to increase but the rate in the latest period is not significantly different to a year ago. The trend in the unemployment rate is decreasing slightly but the rate in the latest period is unchanged from a year ago.

The data for the three months to December 2006 records the employment rate as 76.1% up 0.7 percentage points on a year ago. The seasonally adjusted unemployment rate was 5.2%, unchanged on the same period a year earlier.

Whilst employment levels are high, some regions, such as Dundee City, East and North Ayrshire, Glasgow City, West Dunbartonshire and Inverclyde, experienced levels of unemployment of over 4% for claimant count unemployment as a percentage of the working age population. This compares to 2.8% for Scotland and 2.6% for the UK as a whole.

Although the statistics for economic inactivity for Scotland compare favourably with the UK as a whole, this masks the ongoing problem of areas, particularly though not exclusively, west central Scotland, where inactivity remains persistently high.

The situation with 16-19 year olds not in education, employment or training (NEET) remains a significant concern:

• In 2005, 14 per cent of those aged between 16 and 19 in Scotland were not in education, employment or training, an improvement compared with the position in 1999, but up slightly from 200412.
• The proportion of the young people that are NEET in Scotland remains significantly above the UK average of 11.5 per cent. Scotland is in the bottom quartile when comparing with other parts of the UK, though regional differences outwith the south of England are small.
• The closest international comparison is of unemployment among people aged 15-24. Scotland is top of the third quartile with a rate of 13.9 per cent.

Other groups in society continue to be under-represented in the labour market13:

• Disabled people – the employment rate is 45.7%, dropping to an average of 28% in the most deprived areas (bottom 15%);

• Minority Ethnic people – an employment rate of only 58.7%;

• Lone Parents – employment rate of 55.7% dropping to an average of 38.3% in the most deprived areas;

• People aged over 50 – employment rate of 69.1% but dropping to just 49.2% in the most deprived areas.

The historically high levels of employment are to be welcomed but Scotland, in the face of demographic change, the under representation of the above groups in the labour market must be addressed. The recent influx of migrant workers cannot be relied on to sustain the Scottish economy indefinitely.

Earnings

It is encouraging that, since April 2004, median gross weekly earnings have increased by 4.8%, compared to 2.8% for the UK. In April 2005, median gross weekly earnings in Scotland were £409.60 placing Scotland 4th out of 12 UK regions14.

The positive headline figures obscure less welcome news: there is a large regional variation – from £491.90 in West Dunbartonshire to £362.40 in Moray – and progress on the Gender Pay Gap is painfully slow. The latest figures are particularly worrying: in the year to October 2006 the gender pay gap for mean full-time hourly pay in Scotland rose from 13.6% to 11.9%. For mean part-time females compared with mean full-time males the gap rose to 34.8% from 33.6%15.

STUC Budget Priorities

The following sections have been written to reflect the chapters of the Pre- Budget Report.

3 MEETING THE PRODUCTIVITY CHALLENGE

“In an increasingly integrated global economy, raising UK productivity is critical to delivering continued economic growth and sustained increases in standards of living…..In the last decade, significant progress has been made to strengthen UK productivity growth…..the Government is building on this success to lay the foundations for sustained long-term productivity growth, through increased flexibility and openness and increased investment in infrastructure”. PBR 2006

The policy framework for economic development in Scotland (FEDS and SSS) correctly identifies improving the rate of productivity in the public and private sectors as the key economic challenge. This mirrors policy outlined in the PBR. However, it is doubtful that the policy prescriptions contained in these

documents will ever be sufficient to improve productivity to the levels of our main competitors.

It is the STUC’s view that the PBR presents a complacent account of the UK’s performance and completely ignores key policy areas that could be developed to boost the UK’s productivity.

Scotland’s productivity challenge

Two measures of labour productivity can be used: GDP per worker and GDP per hour worked. The PBR attempts to show that the UK is winning the battle to close the productivity gap by focusing on the GDP per worker figures. GDP per hour worked figures that show the gap has barely closed over the last 10 years are glossed over.

However, GDP per hour worked is generally accepted as the better guide to relative performance because it excludes the effects caused by differences in working hours. The ‘positive’ story outlined in the PBR is essentially underpinned by UK workers working longer hours, taking less holidays and toiling in jobs that have intensified.

The measuring Progress towards a Smart, Successful Scotland: 2006 report confirms the lack of progress achieved to date:

• In 2004, Scotland was ranked in the second quartile of OECD nations;
• GDP per hour worked in Scotland has showed little change relative to the UK or the United States between 1999 and 2004 (note: it is interesting that the report chooses to specifically highlight Scotland’s performance against the United States. Data included elsewhere in the report shows that GDP per hour worked is actually higher in Norway, Belgium and France); and
• To reach the top quartile, GDP per hour worked would have to increase by 7 percentage points.

The measures aimed at improving productivity outlined in the PBR fall into three main areas: improving skills, better regulation and the reform of land use planning. Planning is devolved and the STUC is content that the measures contained in the Scottish Executive’s Planning Bill will improve the system in Scotland if properly resourced. We argue later that over- or inefficient regulation relative to our competitors is demonstrably not a problem in the UK.

Skills

The PBR’s focus on skills is welcome and the STUC looks forward to working with the Scottish Executive on following up the Leitch Review. The long-held trade union view is that there is huge scope for improvement in the UK skills base and the range of activity trade unions are currently involved in to promote learning and skills is testament to our commitment to address this enduring structural problem.

However, it is also crucially important to emphasise that although investing in skills is a necessary condition for higher productivity, it is by no means sufficient.

In the past, the UK’s productivity gap with competitors was blamed on poor industrial relations but, whilst this was never a compelling analysis, it no longer has a shred of credibility. Instead, employers and media commentators look to blame poorly skilled workers, a declining work ethic, over regulation and deficiencies in the school education system for the failure to improve productivity.

Of course, these explanations conveniently omit any reference to the effectiveness of employers in deploying their resources productively. Policy interventions continue to focus on increasing the stock of skills whilst ignoring the ability of employers to utilise new or higher skills effectively.

Unfortunately, all too often the pressure on companies to deliver short-term efficiencies prevents the adoption of the kind of practices required to become more productive in the longer-term. For instance, under-staffing and work- intensification, often the result of the need to boost short-term gains, limit the opportunities for effective staff training.

The results are as inevitable as they are disappointing. As Mayhew and Keep (2006)16 point out:

“If organisations, sectors, or indeed, an entire economy reduce their systemic capacity to replicate the skills they need to sustain and improve production of goods and services, the cumulative long-term consequences are liable to be serious. The most likely outcome is a transfer of responsibility and hence of cost, from the employer to the public purse”.

The authors continue:

“While it may seem a statement of the blindingly obvious that having upskilled the workforce it will be essential to ensure that their jobs are redesigned in order to allow their new-found skills to be deployed to maximum productive effect, the fact is that while there are numerous expensive public programmes aimed at enhancing the skills of the future and existing workforce, there is no parallel effort aimed at bringing about work organisation and job redesign. Despite much talk about the need to ‘work smarter’ a realisation of what this might mean, and what might be needed to help make it a reality seems absent”.

The authors go on to note that the UK is unusual in taking such an approach. How work is organised is widely recognised as an important issue in a number of other European countries, where state-sponsored workplace development programmes have emerged in the pursuit of enhanced productivity and improvements in the quality of working life. Countries that have adopted such an approach include Norway, Sweden, Germany, Finland and Ireland. The introduction of the Manufacturing Advisory Service was a step along this road but the approach requires to be broadened and profile and resources increased.

Academic studies identify skills deficiencies as accounting for only between a fifth and an eighth of the UK’s relative productivity gap with France and Germany17. Skills do not appear to account for the skills gap with the USA at all.

The main explanation for the gap with Germany, France and the USA remains the UK’s persistently poor record on investing in physical capital, R&D and infrastructure. Despite over a decade of macroeconomic stability, the Government’s own evidence suggests that UK companies fail to invest to the levels of our competitors.

The Government’s own analysis

The Government has identified five ‘drivers’ of productivity through which improvement occurs. The STUC believes these drivers have been arbitrarily chosen and represent only a partial account of the influences on productivity performance. However, it is instructive to assess performance against these drivers to date as reported in the DTI’s Productivity and Competitiveness Indicators 200618:

Business Investment: it is reasonable to assume that the macroeconomic stability maintained by the Government through the last decade would have provided firms with an ideal platform on which to invest. However, performance is disappointing:

“The indicators show that the UK has experienced a period of relative macroeconomic stability, compared to its competitors, as measured by the volatility of GDP growth and short-term interest rates, since 1998. However, this has not yet translated into a superior investment performance, as assessed by other investment indicators. UK business investment has averaged a lower proportion of GDP than France, Germany and the USA since 2000. …the UK’s relatively low investment over the last few decades means that the capital stock has a long way to go to catch up with the US, France and Germany”.

Innovation: the report extols the virtues of the UK’s science base but notes the lack of success at exploiting the benefits it provides:

“The ratio of both total and business R&D expenditure to GDP has been consistently lower than in the US, France and Germany over the last decade. This gap may be partly explained by the UK’s sector mix, with the UK having more sectors with low intensity of R&D use. While R&D expenditure is an imperfect measure of innovation, it does provide a measure of the resources in the economy that are devoted to the generation of new knowledge”.

Scotland continues to lag behind in terms of R&D investment. The Scottish Executive’s January 2007 report on business research and development in Scotland reveals spending in 2005 was £584m, 0.59 per cent of GDP compared with 1.08 per cent for the UK. The Scottish Executive report notes that ‘the leading countries in terms of business R&D [in the EU] have expenditure levels more than four times higher than Scotland’19.

How to improve productivity?

If over a decade of economic stability has failed to encourage greater commitment from employers, it is difficult to accept that the PBR prescription will cure the problems outlined above which largely stem from a lack of investment in people, plant and research.

Recent analysis20 suggests that the lack of R&D investment is attributable to the lower levels of retained profits in UK based firms. The main reason for this is the higher dividend payments in the UK. The pressure for UK firms to deliver high returns is undermining prospects for long-term growth. Growth cannot be sustained indefinitely with low levels of investment.

The response therefore, surely must be to encourage higher levels of investment and the promotion of high performance workplaces able to make the most efficient return on capital and skills investment.

Recommendations

• Recognising our poor record on business investment, the Budget should launch a review of all factors mitigating against higher business investment in the UK;
• Government at all levels to examine ways in which the public sector can develop workplace development programmes along the lines of our European competitors;
• Recognising the unwillingness of businesses to invest, Budget 2007 must look at extending incentives for R&D investment and examine how these might be extended to wider innovative practices.

Regulation

Once again the PBR is all too predictable in its unnecessary and ill-conceived focus on regulation. As our 2006 Budget Submission made clear, the STUC:

• Supports measures aimed at assisting employers to comply with clear and efficient regulation; and
• Recognises that regulation cannot remain static in a modern economy – it must develop to remain relevant.

However, effective regulation is unavoidable if we truly aspire to:

• Modern high performance workplaces which maximise employment opportunities through support for working parents;
• Healthy and safe workplaces;
• Fair and equal pay; and
• Sustainable economic development.

The complacency demonstrated by the following passage in the PBR is astonishing:

“It is no longer the case that most businesses, if unregulated, will act irresponsibly. Well informed consumers, responsible companies, organised labour, pressure and interest groups have all encouraged businesses to take measures to reduce risk to society”.

The instances where the interests of workers, consumers and the environment have been ignored by unscrupulous businesses are too many to mention. The handling of the recent redundancies at Simclar in Ayrshire is but one example.

Those who push the deregulation agenda are responsible for embedding an orthodoxy that the UK is over regulated but the international evidence (cited earlier) clearly demonstrates that the reverse is true.

The arbitrary target driven approach outlined in the PBR and currently being pursued with vigour in Westminster raises a number of serious questions:

• How is the baseline of administrative ‘burdens’ on business established?
• How is the 25% cut measured?
• What level of scarce civil service resources will be devoted to this priority?
• Does it preclude any new regulation on business?
• What are the consequences for the safeguarding of the rights and interests of workers, communities and the environment?
• What will be the impact on good employers who are bound to be undercut by those with no regard to their wider social responsibilities?

The STUC supports, and will continue to participate in, the Scottish Executive’s sensible, proportionate and focused approach to Better Regulation. A target driven approach is absurd, inefficient and bound to have adverse consequences on long-term prosperity, workers’ rights and the environment.

Budget 2007 should:

• Drop the Government’s arbitrary target based approach to Better regulation;
• include reference to the positive role of regulation in a modern knowledge based economy and refrain from, once again, pandering to the evidence-challenged lobbying of employer organisations;
• instigate a review of regulatory impact assessments (RIAs). At the moment they are unhelpful at best and many are actually misleading. We need to develop measures that balance the costs and benefits for employers, workers and society.
• Recognise the case for stronger social partner involvement in designing and implementing regulation, especially in the labour market. Where this has been done the outcome is often better designed and commands wider support than when regulation is left entirely to the Government.

Manufacturing

In Scotland, manufacturing industry provides employment for 225,00021 people (a fall of 8000 over the year to September 2006) and accounts for around 20% of GDP and 70% of all exports. Whatever the perception about the future of manufacturing, it remains vitally important to the Scottish economy.

Recent redundancies at NCR in Dundee and Simclar in Ayrshire, and fears over the future of Weir Pumps in Cathcart, have served to highlight the ongoing fragility of manufacturing employment in Scotland today. On a more positive note, encouraging export statistics indicate all is far from lost.

The STUC’s main concern is that, at a time when globalisation is putting manufacturing in developed countries under pressure, some competitor nations are proving far more adept at retaining manufacturing jobs. This is the case even in countries where the regulatory regime is more robust and business taxation higher. Of course, what these countries tend to have in common is a higher rate of productivity per hour worked and a superior record of investing in people, plant, infrastructure and research.

This suggests that those who propose a future for Scottish manufacturing based on cost minimisation rather than productivity augmentation have got it wrong. We will not safeguard Scottish manufacturing by privatising the water industry or slashing protection for workers, consumers and the environment. Business conditions are generally good and have been for a decade. The disappointment is that too few companies have taken advantage of the favourable conditions to invest.

The STUC has expanded on the future of Scottish manufacturing in a recent paper. Included in the list of recommendations were:

• A review, leading to the improvement and simplification, of all business support available to manufacturing enterprises;
• Smarter use of the flexibilities in EU procurement law to support indigenous manufacturing;
• Strategic use of state aid to help vulnerable companies within Scotland’s priority industry sectors restructure or specialise; and
• the state of manufacturing industry to be included in the remit of the Bank of England Monetary Policy Committee when setting UK interest rates – and for the MPC to include people with understanding and experience of industry.

4 INCREASING EMPLOYMENT OPPORTUNITY FOR ALL

Welfare Reform

The STUC recognises the continuing success of the Government in creating record levels of employment in Britain. STUC also supports the headline aims of tackling economic inactivity contained within the Welfare Reform Bill. Regrettably the many positive aspects of the Bill are undermined both by proposed sanctions, which risk placing undue and unnecessary pressures on the sick and disabled, and by the ongoing programme of cuts and privatisations affecting the DWP and Job Centre Plus in particular.

The STUC is clear that the welcome commitment to increasing labour market participation in Scotland must be centred on the creation of decent and sustainable job opportunities with adequately funded and organised occupational health support.

Serious obstacles remain to the employment of disabled people and Britain already spends much less on employment help for disabled people than any other European country.

Budget 2007 should:

• increase support for the Access to Work programme which provides subsidies to help disabled workers and their employers meet any extra costs that might otherwise act as a barrier to employment.

The STUC also recognises that supported workplaces continue to be one important piece of the jigsaw for disabled workers.

Budget 2007 should, therefore:

• include a commitment to the future of REMPLOY.

Migrant workers

The STUC strongly welcomes migrant workers to Scotland both in terms of the economic and cultural benefits they bring. However, accession monitoring proves conclusively that the vast majority of workers are in low pay, low skill professions - 80 per cent earn less than £6 per hour. A worrying proportion remains in illegal and/or dangerous employment.

The STUC believes that Scotland has much to gain from welcoming migrant workers, encouraging them to make their homes and bring up families here. When those predicted to leave their jobs through retirement are taken into account, the Scottish labour market is likely to be able to accommodate an expanding workforce which includes significant number of workers from overseas. However, it is vital that their talents are recognised and properly utilised through better accreditation of overseas qualifications and the provision of adequate funding for ESOL courses.

To improve the position of migrant workers, Budget 2007 should include measures to:

• tackle exploitative employment practices and protect agency workers;
• make available funds to improve the basket of services offered to migrant workers to ensure that experiencing decent employment and social conditions is the norm.

Women and Work

The STUC recognises that the gender pay gap is bad for working women and their families, bad for business, and bad for the UK and Scottish economies.

The Women and Work Commission has estimated that removing barriers to women working in occupations traditionally done by men, and increasing women’s participation in the labour market, could be worth between £15 billion and £23 billion or 1.3 to 2.0 per cent of GDP.

The likely causes of the pay gap are well-known, with gendered skills gaps, horizontal and vertical occupational segregation, organisational factors (including trade union organisation), workplace flexibility, the low rates of pay attached to part-time working, and discrimination within pay systems being identified in most models of the pay gap as underpinning gendered pay disparity.

The STUC is disappointed, therefore, that the recommendations for action identified by the Women and Work Commission, and taken forward by Government, focus almost exclusively on human capital development and moving women away from stereotypically female occupations.

A significant proportion of the gender pay gap is attributable to employers’ continued failure to address discrimination within their pay systems and to remedy the undervaluation of traditionally female occupations like the “5 Cs” of cleaning, catering, clerical, caring and cashiering (retail).

The undervaluation of so-called “women’s work” is not only problematic for those women and men employed in said sectors. It also has the potential to undermine progression towards long-term Government goals. Delivery of high-quality childcare supports social inclusion outcomes and facilitates women returners re-entry into the formal labour market. High-quality childcare is less likely if workers within the childcare sector themselves experience a lifetime of poverty wages and perceive their jobs to be of low-status and low- value.

The STUC calls for budget 2007 to consider:

• The need for public sector bodies to pay women workers fairly and address the persistent undervaluation of women’s work, particularly given the need to achieve compliance with the Gender Equality Duty.

The STUC welcomes Government initiatives that have extended leave entitlement for parents and carers, and have provided rights to request to work flexibly. However, there are still significant pay and career penalties for women who become mothers, and a lack of positive measures to enable men to participate in caring on an equal basis with women.

Currently, women and men who reduce hours to care for family are expected to be grateful for being allowed to do so, rather than adequately compensated for their reproductive labour. If we accept that producing and bringing up children confers a public benefit then consideration should be given to compensating the pay penalties experienced at this time.

The STUC calls for budget 2007 to consider:

• The need for a part-time paid leave for carers, similar to the Swedish paid parental leave, which would provide compensation for earnings lost while caring for young children.

5 BUILDING A FAIRER SOCIETY

Pensions Savings

The STUC remains concerned that employers in the United Kingdom continue to close final salary pension schemes without consultation with trade unions representing members of the scheme. The closure of the Royal Mail scheme

to new members in this way is the latest in a long line of scheme closures where those in scheme membership are not consulted.

The combined deficit of the schemes of the FTSE 100 companies has been reduced dramatically since their high of £90 billion in March 2004. It is now estimated the overall deficit of these schemes is £31.8 billion with an £8.2 billion reduction being witnessed between December 2006 and February 2007. Watson Wyatt, the pensions consultants, predicts that given current stock market conditions these deficits will continue to fall throughout 2007.

The Government has to reconsider its position on tax relief for pension scheme investments to make final salary schemes, once again, the accepted standard for occupational pension provision.

The STUC welcomed the decision of the European Court of Justice that the Government had failed to properly implement the European Insolvency Directive. This decision following a case brought by affiliated trade unions is a victory for all individuals whose security in retirement has been wiped out following the collapse of occupational pension schemes.

We believe the Government should ensure full compensation is paid to victims of all scheme insolvencies retrospectively and not only for those schemes becoming insolvent after May 2005. Urgent action is required by Government to compensate those who have lost out and an immediate review of the Financial Assistance Scheme and the Pensions Protection Fund, including their funding is required.

The Government’s plans to introduce the National Pensions Saving Scheme have been broadly welcomed by the STUC. However, we have concerns that combined contribution levels of 8% are too low and, as a result, employers may level down existing contributions to defined contribution schemes to this level.

We also have reservations that those earning under £5000 will not have access to a NPSS and this is danger of excluding the population who lose out in relation to state and occupational pension provision, low paid and part-time workers, who are mainly women.

The Government should consider compulsory contributions from employers and financial assistance through tax relief for individuals earning under £5000 who wish to opt in to the NPSS scheme.

State Pension Provision

Although the STUC welcomes many of the Government proposals to reform the state pension for many individuals, the reforms will come too late to increase their financial security in retirement. A study by the Joseph Rowntree foundation in 2006 found that approximately 20% of Scottish pensioners were living in poverty.

Further research by the Pensions Policy Institute, included in their response to the Government’s White Paper in September 2006, indicates that many of the improvements aimed at reducing current inequalities in the state pension will have little effect on today’s pensioners.

The STUC welcomes the restoration of the link to earnings, rather than prices, but feels that the implementation date of 2012, even then only if the fiscal position allows, will be too late to alleviate the poverty suffered by pensioners today. The restoration of the link to earnings should be implemented as soon as possible.

The restoration of the link to earnings should also be extended to cover the state second pension (S2P) and it is anomalous that the Government plans to have one portion of the state pension linked to earnings and the other to prices.

Additionally, the Government has no plans to reduce the number of years qualifying contributions for eligibility to claim S2P. The Pensions Policy Institute estimates that between 49 and 52 years contributions will be required to qualify for full S2P.

The STUC feels that this will continue to discriminate against women workers who are more likely to have gaps in their National Insurance credits history. The Government should equalise the contributions of both the Basic State Pension and the S2P at thirty years to address the potentially discriminatory effect on women.

The STUC also believes the Government should examine the effect that their current proposals have on future retirement income and address the potential widening income gap between the richest and poorest pensioners. It is estimated that the current proposals will provide an extra income for poorer pensioners of £5 per week while those at the opposite end of the income distribution scale will be £20 per week better off.

The Government should examine opportunities to provide increased retirement income to poorer pensioners and ensure that the distribution of state pension provision targets those with least income.

6 DELIVERING HIGH QUALITY PUBLIC SERVICES

The STUC is engaged in an ongoing discussion with the Scottish Executive about a strategic approach to public sector revitalisation based on partnership and investment in people and a commitment to value and support the public sector ethos.

The STUC believes that public services should be run on ethical lines based on the principles of selflessness, integrity, objectivity, openness, accountability, competence and equality. We continue to oppose PFI and PPPs and deplore the effects of such schemes on public services, in terms of the impact on public sector workers, the quality of public services and the

value for money over the lifetime of each scheme. The STUC believes that PPP and PFI undermine these principles as they undermine accountability, transparency and flexibility.

Although the debate over ‘crowding out’ in Scotland is ongoing, it is encouraging that much of the academic literature produced over the past year provides compelling evidence of the positive relationship between public spending and growth. Peter Lindert’s massive study: Growing Public – Social Spending and Economic Growth since the Eighteenth Century22 is particularly instructive. Noting that the real world fails to perform in the way predicted by many economists and media commentators, he reaches a number of conclusions, including:

• The net national costs of social transfers, and of the taxes that finance them, are essentially zero. They do not bring the GDP costs that much of the Anglo-American literature has imagined;
• Two general principles seem to explain why welfare states will not collapse. The first is that high budget democracies show more care in choosing the design of taxes and transfers so as to avoid compromising growth. The second is that broad universalism in taxes and entitlements fosters growth better than low-budget countries’ preference for strict means testing and complicated tax compromises.

Scotland faces many serious economic and social challenges: a declining and ageing population, an appallingly low rate of R&D investment, retaining a manufacturing base in the face of global competition, upskilling and tackling the legacy of the disastrous labour market policies of the 80s and 90s that have left us with pockets of persistently high economic inactivity. It is high time the business community acknowledged the simple truth that a strong public sector is fundamental to meeting these challenges effectively.

Budget 2007:

• must emphasise the fundamental role that the pubic sector plays in economic development. An effective UK response to globalisation will be underpinned by a strong public sector employing staff who are motivated and well renumerated.

7 PROTECTING THE ENVIRONMENT

Energy

The issue of security of supply remains a major concern to our affiliates particularly those with members in manufacturing. The business lobby was largely silent whilst the STUC forewarned of the dangerous impact of the lack of a credible energy policy for Scotland.

The STUC provided the Government’s Energy Review with a comprehensive submission which has been followed up by meetings with the Scottish Executive Energy Minister and DTI Energy Minister. We continue to work closely with governments at all levels on energy matters.

• The UK Government must grasp the opportunity provided by the Energy Review to fundamentally address the key issues of security of supply, affordability and climate change.
• A balanced energy policy for Scotland is required, one that is based on a diversity of fuel sources in order to ensure security of supply. We should aim to produce an energy surplus to export, recognising the importance of the industry in providing high quality jobs.
• The wider economic impacts of energy policy cannot be overlooked any longer. We must not repeat the story of UK innovation leading to manufacturing gain elsewhere due to lack of investment.

The STUC is particularly disappointed by the level of support provided to Carbon Capture and Storage in the PBR. The aspiration should be for Scotland to be co-firing indigenously produced coal with biomass in modern, highly efficient clean coal plants utilising technology manufactured in Scotland. Capturing and storing the emissions produced is the final piece in the clean coal jigsaw. If Scotland can achieve this aspiration, massive export opportunities are bound to flow from it.

The further rise in gas oil duty contained in the PBR is also worrying for trade union members employed in coal production. The last couple of years have seen hundreds of redundancies in this sector which plays a key economic role particularly in areas still struggling to adapt to the loss of deep mining. Although the STUC finds employer arguments about the total tax burden impossible to accept, we do have real concerns over the impact of targeted rises on the coal production sector.

The STUC is also firmly of the view that trade unions are ideally placed to lead workplace sustainability programmes. Reducing the environmental footprint of the UK’s workplaces should be a key priority in tackling climate change. Good practice developed in the workplace will lead to good practice in the home.

Budget 2007 should:

• Provide sufficient funds for effective Carbon Capture and Storage projects in the North Sea;
• Reduce duty on gas oil in order to safeguard jobs in the coal production sector; and
• Provide additional resources for workplace sustainability programmes.

Footnotes

1 “Up to the Job? How India and China risk being stifled by a skills squeeze”, Jo Johnson and Richard McGregor, Financial Times, 20 July 2006

2 Eurostat

3 The Writing on the Wall, Will Hutton, Little and Brown, 2007

4 GDP 3rd Quarter 2006, Scottish Executive http://www.scotland.gov.uk/News/Releases/2007/01/24094441

5 Royal Bank of Scotland’s Purchasing Managers’ Index for January 2007, reported in The Herald, 12 February 2007

6 http://www.doingbusiness.org/EconomyRankings/

7 Product Market Regulation in OECD Countries, OECD Working Paper no 419, April 2005.

8 The Economist, 18-24 November 2006

9 Scottish Economic Statistics 2006, Scottish Executive

10 Scottish Economic Statistics 2006, Scottish Executive

11 Scottish Labour Market First release, January 2007, Office for National Statistics

12 Measuring Progress Towards A Smart, Successful Scotland 2006, Scottish Executive

13 Annual Population Survey In Scotland 2005, Scottish Executive

14 Scottish Economic Statistics 2006, Scottish Executive

15 Annual Survey of Hours and Earnings 1998 to 2004 (excl. supplementaries), 2004 (incl. supplementaries), 2005

16 Keep, E, Mayhew, K and Payne, J (2006) “From Skills Revolution to Productivity Miracle: not as easy as it sounds?”, Oxford Review of Economic Policy, Vol. 22, No.4

17 Ibid

18 DTI Economics paper no.17, UK Productivity and Competitiveness Indicators 2006

19 Business Enterprise Research and Development Scotland 2005, Scottish Executive, January 30 2007

20 See Guardian articles

21 Labour Market First Release Scotland, January 2007, Office for National Statistics

22 Growing Public – Social Spending and Economic Growth since the Eighteenth Century, Peter Lindert, Cambridge University Press

Further information

Further information about the STUC, our activities and policies (including full version of STUC energy policy, and recent economic discussion papers on manufacturing and regulation), as well as details about how to contact us, is available on our website: www.stuc.org.uk