STUC Response to the Scottish Government’s Economic Strategy

STUC January 2008

Introduction

The STUC appreciates the open and collaborative approach adopted by the Scottish Government in developing its Economic Strategy.

The STUC provided the Scottish Government with a comprehensive submission as a contribution

to the development of the Strategy and the following paper forms the STUC response. It focuses on the following areas:

• Targets – is the new target regime appropriate?
• Evidence base – how robust is the evidence underpinning the new approach?
• Business taxation – how will the proposed cut be effectively monitored and evaluated?
• Scottish Spending Review 2007 – does the Spending Review support the priorities included

in the Economic Strategy? - Economic development policy – does the new strategy constitute a radical departure from

its predecessor A Smart, Successful Scotland? - Council of Economic Advisers/National Economic Forum – what is to be the role of these bodies in developing/implementing policy?

The Economic Strategy

The strategy is ambitious and introduces a welcome clarity of purpose. The target regime is balanced and the Strategic Priorities fair. In particular the Strategy recognises, perhaps for the first time, that the quality of Scotland’s workplaces has a direct impact on economic growth and the sustainability of that growth.

In discussing Scotland’s productivity deficit, the Strategy helpfully acknowledges that ‘how resources are used also has a considerable impact on productivity – this is often due to differences in management practices, production processes and the role of complementary investments and innovations’.

The strategy also recognises that Scotland’s performance on skills has not led to related improvements in productivity and recognises that ‘It is essential that we empower our current and future workforce to use their skills creatively and innovatively in our economy’.

The STUC looks forward to working with the Scottish Government and other partners to produce a step change in the quality of Scotland’s workplaces. We urgently need to address the following questions:

• What type of workplaces will contribute to the achievement of the Economic Strategy?
• How can we develop workplaces that harness and utilise the collective skills knowledge of

our greatest asset – people? - Do our workplaces have the capacity to take advantage of policies designed to stimulate increased productivity, innovation and R&D?

Targets

Perhaps the major innovation in the Strategy is the introduction of a set of targets. The Government states in the Strategy that it will “be judged by the progress that we make towards them.” The targets are:

By 2011-

• To raise the GDP growth rate to the UK level;
• To reduce emissions over this period.

In the longer term -

• To match the GDP growth rate of the small independent EU countries by 2017;
• To rank in the top quartile for productivity amongst our key trading partners in the OECD

by 2017; - To maintain our position on labour market participation as the top performing country in

the UK and close the gap with the top 5 OECD economies by 2017; - To match average European (EU15) population growth over the period from 2007 to 2017, supported by increased healthy life expectancy in Scotland over this period; - To increase overall income and the proportion of income earned by the three lowest income deciles as a group by 2017 (the SOLIDARITY ‘Golden Rule’); - To narrow the gap in participation between Scotland’s best and worst performing regions by 2017 (the COHESION ‘Golden Rule’); - To reduce emissions by 80 per cent by 2050 (the SUSTAINABILITY ‘Golden Rule’).

The Government should be congratulated for not including a target on ‘competitiveness’. The STUC argued strongly in its submission that such a target would lack credibility and inevitably ratchet up the tax-cutting and deregulation agendas.

The targets have been welcomed in many quarters as helpful confirmation of the Government’s intent and ambition. In its briefing on the Strategy, the Centre for Public Policy in the Regions (CPPR) noted the potential usefulness of such targets; ‘even if they end up being largely symbolic, the very existence of such targets is a sign of greater aspiration in the filed of economic growth’.

Others have noted, as did the STUC in our submission, that the targets create a huge political hostage to fortune. Few if any other countries or regions set a target for GDP growth. Others recognise that, particularly in the short run, public policy can only exert limited influence over growth levels. For a small, open economy like Scotland, targets are very likely to be affected by global economic pressures completely beyond the control of the Scottish Government.

The targets are also relative. Therefore, if as currently anticipated, there is a general slowdown in the world economy, the target growth rate could fall. It is entirely possible that the target will be achieved (i.e. the gap with the rest of the UK will be closed) although growth actually declines in both Scotland and the UK.

There is also a powerful argument that a target focused on GDP growth is inappropriate. As the CPPR note, ‘much of the UK growth rate (vis-a-vis Scotland) is accounted for by a faster growing population which in turn results in higher growth, but not a higher standard of living (when measured by GDP per capita)’. Scotland’s performance has been much closer to the UK when using this measure.

The introduction of ‘Golden Rules’ on Solidarity, Cohesion and Sustainability is by no means unwelcome. It is entirely proper that the Government should seek to ensure that economic growth benefits all citizens and regions and does not come at the expense of the welfare of future generations. However, the targets in this respect are particularly ambitious and the Strategy is weak on the detail of the policies the Government intends to implement to achieve these challenging goals. It is difficult to perceive how the Solidarity target can be achieved when the Scottish Government does not have control over taxation and benefits.

In any event, these would only exert marginal influence unless current economic orthodoxies were radically challenged and the Strategy offers few signs that this would be the case.

The Strategy does not consider the trade-offs between increased GDP growth and the ‘golden rules’ which are inevitable in the short, medium and longer runs. With the media focus firmly placed on the growth targets, the STUC is concerned that these could become the political imperative with the golden rules becoming a secondary tier.

Evidence

The Strategy is a Government policy document not an academic text and therefore it is entirely proper for it to be light on references and detailed analysis. However, too little effort has been expended on trying to connect policy prescriptions with analysis and/or data.

The STUC was critical of aspects of the previous policy framework but when the Framework for Economic Development in Scotland (FEDS) was announced in 2003 it was at least accompanied by a sizeable volume of analysis intended to support the policy direction signalled in the main paper. No similar exercise was undertaken on this occasion. This lack of rigour is particularly significant with regard to:

a) Business taxation: although the published Strategy is more moderate in its expectations on the impact of the manifesto commitment to cut business rates for SME’s, Ministerial statements remain over optimistic:

“To provide the competitive advantage that those small companies require, I am delighted to announce to Parliament today, that from April next year, 150,000 small businesses throughout Scotland will have their business rates reduced and, in due course, for many, removed by the SNP Government”.

This statement is revealing. The STUC does not believe that Scottish companies will ever derive a sustainable competitive advantage from tax-cutting measures such as this. If we accept that there are two basic types of competitive advantage – cost advantage and differentiation advantage – it is difficult to envisage Scottish firms effectively competing in the global economy on cost advantages alone.

This reflects the problem with much policy development over the last few years. Economic development policy as set out in A Smart, Successful Scotland and the new Economic Strategy seeks to develop a Scotland where firms find advantage in differentiation. However, Scotland’s flexible labour market and the apparently inexorable fall in business taxation and regulation provides companies with a legislative framework that allows and indeed encourages them to pursue competitive advantage by cutting costs. The STUC believes that this constitutes a fundamental disconnect in Government policy.

The Budget announced the introduction of a Small Business Bonus Scheme which will be administered by Local Authorities. From 2008 it will progressively reduce the ‘rates burden’ for businesses with properties whose combined rateable value is £15,000 or less. By 2010, the ‘rates burden’ will be

• removed for those businesses with rateable values of £8,000 or less;
• halved for businesses with rateable values of £8,001 to £10,000; and,
• reduced by a quarter for businesses with rateable values of £10,001 to £15,000.

The Government argues that it will ‘cut the rates bills on around 150,000 properties across Scotland, giving small and medium sized businesses a real opportunity to grow and to invest in their future’.

The STUC notes that the moves to reduce taxation on small businesses receives cross-party support in the Scottish Parliament. Although the parties may quibble about the detail there appears to be no dissension about the general principle that cutting small business taxation will necessarily boost economic growth in Scotland.

The STUC is happy to puncture the consensus on this issue. There is scant, if any, evidence to support the proposition that the Small Business Bonus Scheme will boost growth in Scotland. Indeed, mainly due to the relentless campaigning of employer representative organizations on this issue, it has assumed an importance in public policy debate that is out of all proportion to its potential impact on the economy.

Professor David Bell, Adviser to the Finance Committee on the Budget notes that,

“The scheme is interesting but requires a clear evidence base. In particular, it is important to know the contribution that such firms make to economic growth and how the reduction in business rates will affect medium-size and larger firms”.

It is worth remembering that the introduction of the Uniform Business rate was accompanied with claims that it would boost growth and employment. No exercise, as far as we are aware, has ever been undertaken to assess the impact of the UBR.

The STUC believes that:

• the SBBS is a poor use of public funds in a tight Budget settlement;
• at the very least, the Government should have incentivized the tax cut in order to drive up standards in the economy; and,
• the Scottish Government must now clarify how it intends to monitor and evaluate the impact of the scheme.

The STUC believes that the economic impact would have been greater if the funding had been spent on any of the following:

• Skills, science and innovation
• Skills utilization/high performance workplaces
• Co-investment
• Higher education

b) The ‘Arc of Prosperity’: the Strategy treats Scotland’s economic underperformance as a revealed truth that only requires to be asserted not demonstrated. The only evidence offered in support is some statistics comparing Scotland’s recent performance to the UK and the ‘arc of prosperity’ countries: Ireland, Iceland, Norway, Denmark and Finland. The Strategy treats these countries as a cohesive unit despite, for instance, Ireland having a very different social/economic model to Norway and Denmark. The Strategy carefully selects indicators from these countries when it suits the argument whilst ignoring inconvenient facts i.e. that Ireland is a more unequal country than Scotland.

Economic Development Policy

The STUC welcomes the endorsement of much of the good work already underway in Scotland. For instance, the Priority Industry strategy is retained and it is helpful that the Government’s R&D and innovation support programmes will now be handled by Scottish Enterprise. The opportunity should be used to align these closely with the Priority Industries whilst retaining the flexibility to assist all Scotland’s companies to grow.

It would be helpful to receive clarification on the future of what were previously described as ‘regional’ priority industries: construction, aerospace, chemicals, forest industries, shipbuilding/marine and textiles. These were identified as having an important role to play in developing the Scottish economy but with more limited potential for growth. All remain fundamentally important to the Scottish economy and the STUC would expect them to be treated as key sectors by the networks.

There is a general lack of detail throughout the Strategy. Many of the actions listed under the Strategic Priorities don’t really constitute actions at all – they are often simply aspirations to act in these areas. For instance, ‘focus on work with employers and employees to increase the effective utilisation and demand for skills’.

Similarly, the sections on investment, skills utilisation and procurement are less than robust. However, the references to regulation are much more balanced than anticipated and this is to be welcomed.

The Budget and New Economic Strategy

The Budget was announced the day after the new Economic Strategy was published. There are a number of areas where spending commitments do not appear to match up to the aspirations contained in the strategy:

• Further and Higher education – the funding increase over the review period is forecast to rise by only 0.5% pa in real terms, which is below the overall Scottish average spending rate of 1.5%;

• Enterprise - Scottish Enterprise and Highlands and Islands Enterprise also face real reductions in their budgets. This may be balanced by the transfer of some responsibilities to local government but the Budget document does not clarify the timescales and whether local government will be allocated additional funds;

• Innovation and Investment – falls 2.6% in real terms over the review period;

• Energy and Climate Change – received an annual average real terms increase of 15% although from a relatively low base;

• Transport – spending on motorways and trunk roads will rise by 9.2% in real terms. Excluding this budget item means spending on transport falls 2.2% pa in real terms; and,

• Planning – receives a 27% pa real terms increase but again this is from a very low base (only £2.5m in 2007/08). However, this increased must be balanced against the increase in workload and expectations following implementation of the Planning Act.

Again, the STUC is concerned that the funds could be found for the business tax cut whilst these areas did not fair as well as might have been expected.

Powers of the Parliament

The Strategy contains a section relating to the further powers the Government believes it requires increasing growth in Scotland. With regard to employment policy it states that ‘further devolution of employment policy would improve accountability and provide greater coherence between economic and employment policy, allowing the balance between workers’ rights, the level of the minimum wage and the need for a flexible workforce to reflect Scottish labour market conditions’.

There is an interesting contrast here with Government statements on corporation tax. The Government is content to be very specific about the reductions it proposes in corporation tax should this power be devolved or should Scotland become independent.

However, even the direction of travel is not clear on employment policy. Some, not least George Mathewson, Chair of the Council of Economic Advisers, would argue that the Government should seek to reduce employment protection legislation to provide Scotland with a ‘competitive advantage’ over its near neighbours. Others, such as the STUC, would argue strongly that there is no future for Scotland in pursuing low road strategies based on cost minimisation and work intensification. It is a sad fact that the UK’s deregulated labour market opens this route for too many Scottish businesses.

The STUC looks forward to discussing this matter with Ministers over the course of this Government.

Council of Economic Advisers/National Economic Forum

The paper indicates that the Council of Economic Advisers, despite only having met once, was ‘highly influential in shaping this strategy’. The National Economic Forum, which will meet for the first time in February, will have a role in ‘building consensuses.

The STUC welcomed the new administration’s proposals to establish a Council of Economic Advisers (CoEA). We believe that debate on the Scottish economy is consistently poor and characterised by the lazy promulgation of myths around taxation, regulation and size/efficiency of the public sector. There is also a pressing need to improve the quality of data available to Scottish policymakers. A Coe undoubtedly had the potential to play a key role in remedying this unfortunate situation.

However, the STUC does not believe that business people have a role to play on this body. Unfortunately our fears were confirmed by Sir George Mathewson’s excitable and evidence-challenged first appearance before the Economy Committee where he, rather incredibly, identified employment legislation as a major barrier to growth in Scotland.

The STUC believes that the CoEA should be reconstituted along lines similar to the enduring and respected US Federal model: the American Council comprises only a chair and two other members supported by a staff of around 20 economists and statisticians. Chair, members and supporting staff are seconded from academia. The Council is charged with appraising the various programs and activities of the Federal Government and developing and recommending to the President national economic policies ‘to maintain employment, production and purchasing power’.

Of course, many will justifiably question the degree of influence exerted by the American Council. Alan Greenspan and others have praised the quality and consistency of the Council’s advice whilst noting the wildly fluctuating economic policies pursued by different administrations. Nobel Prize winner and former Council Chair Joseph Stieglitz has highlighted the blunt reality that the sober, informed advice of the Council is regularly trumped by campaigning of corporate lobbyists on key issues such as the regulation of financial services and energy, trade and intellectual property.

Sober, independent advice from economists should not be mixed up with corporate lobbying as in the Scottish model. A small council of independent academic economists with a range of specialism’s could benefit Scotland greatly, particularly if it is augmented by a robust National Economic Forum involving a range of business, trade union and civic interests.

The STUC has long argued that economic debate as well as policy development and implementation would benefit from the establishment of a ‘social partnership’ mechanism involving key players in the Scottish economy. In our earlier submission we argued that,

“The STUC looks forward to participating in the Government’s National Economic Forum, which, if handled correctly, can be a vehicle for creating and sustaining the ‘harmony of interests’ necessary to support sustainable economic growth”.

In discussions with officials and advisors the STUC has argued that the NEF must be focused and able to deliver real outcomes. It should involve only bodies with wide representative interests who can demonstrate real accountability to their constituencies. Therefore, the STUC envisaged the forum involving trade unions, employer representative groups, SCVO and local authorities.

The STUC looks forward to discussing the composition, role and remit of the NEF with Ministers over the coming months.

Copyright

STUC January 2008