Driving economic growth in Scotland

Economic change lies ahead; can Scotland respond? Even after so many manufacturing and extractive industry jobs have been replaced, there is still activity at risk as traditional sectors shrink. The loss of listed companies and headquarters makes it harder to identify growth leadership. Can all of Scotland’s various commissions, studies and initiatives now be pulled into a concrete plan?

The last three years has seen the creation of the Scottish National Investment Bank (SNIB) and spurred more academic research. Many initiatives are underway and the Economy and Fair Work Committee has already met ten times this year. There are some bold projects, but inevitably scrutiny tends to be about gaps and detail. Amidst a cost of living squeeze it is natural for political focus to be on encouraging banks to provide more financial support and have greater tolerance for hardship.

With fewer national champions, there is some justification for more granular policy. With 98% of Scotland’s firms employing fewer than 50 people, it is clear that enterprise in smaller and medium sized businesses matters. But identifying specific fixes is complex. The growth solution for Scotland may involve working on broader levers.

The big picture is clearer about the challenge. In the 40 years to the global financial crisis of 2008, Scotland’s economic growth rate averaged 2.3% per year. Since then growth has slowed, as indeed it has in many Western nations. But the recent projection from the Scottish Fiscal Commission suggests an annual rate of just 1.2% over the next 50 years. That is close to the rate assumed in some official projections for the next 10 years and similar to the UK forecast. But even in a world of lower growth, this seems likely to disappoint those who envisage dynamism in the Scottish economy to drive fairness and sustainability.

Indeed, there is no shortage of adjectives applied to our aspirations; high-tech, net-zero, well-being, competitive, inclusive and powering innovation. Certainly, the labels should mould the outcomes. But it is less clear that they offer a different route to fostering growth itself. The shape of a society and its economy emerges over time, and will likely require political intervention where change is not fast enough or there is market failure. That is not the same as making the economy bigger.

In contrast, growth itself typically comes from inputs well understood by economists; productivity, capital investment, infrastructure, technology and growth of population and workforce. Driving these are education, savings and innovation. The debate on growth is useful in establishing goals and developing a sense of shared purpose. And initiatives can be additive to the prosperity brought by established enterprises. But achieving success will involve identifying the main drivers of growth that are recognised by economists and addressing any negatives. Can Scotland lever the key growth factors?

Productivity is a challenge for most advanced Western economies, with the UK performing particularly poorly. UK productivity growth since the financial crisis has trailed competitors such as Germany, France and the US. Underlying this, for the UK as a whole, combined public and private investment relative to total output ranks very low in EU and world terms. This chronic underinvestment over the past half century in Scotland and the UK, is a likely contributor to low productivity gains. UK business investment lags competitors; around 10% of output versus 14% for our peers. The UK also invests disproportionately in housing. Investment is a crucial issue for growth that needs more analysis.

Action is also needed on Scotland’s performance in innovation, which lags behind European peers. Scotland’s lower overall expenditure on research and development as a proportion of output contributes to this. However, this does not tell the whole story as R&D within Scotland’s universities is world-leading in many areas. The issue appears to be in the relative lack of technology-based companies in Scotland and poor business expenditure on R&D. There would be value in trying to influence these elements – beyond the work already done by the SNIB and development agencies.

Scotland is building new potential for business creation in sectors such as Greentech and Biotech, driven by its major universities. There is a focus on bringing different disciplines together and combining new technologies with social understanding to solve problems in society. This should be a catalyst for regeneration, and Scotland has an edge in this approach. University research and spin-outs are a key positive for Scotland’s growth.

Scotland’s population is projected to decline over the next quarter century, contrasting with growth in the other nations of the UK. This poses challenge for the expansion of the working population, although not insurmountable. Capital will also be harder to attract in a more competitive global environment, with banks currently under pressure. National policy can help overcome the labour and investment headwinds, but it does highlight the importance of education, training and productivity.

Part of the problem seems to be embedding growth as a UK objective. The Bank of England is currently focused on controlling inflation and financial stability, with the Treasury addressing public expenditure and tax. No-one really seems to own the growth aspiration or be willing to make policy that spans electoral cycles. There is no UK institution directing supply-side growth, such as the US National Infrastructure Commission - not quite the same as public spending. Scotland had an Infrastructure Commission and mooted the possible creation of a Scottish national infrastructure company. This was a different ambition than the SNIB and may be worth pursuing.

Scotland’s future economy is capable of delivering growth with the characteristics that society wants. But there may need to be more focus on how to drive the major determinants of growth itself. A shift in productivity could deliver big results, as could building on the success of Scotland’s universities.

A version of this article was published in The Herald on 12.4.2023.

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