Insight: Scotland’s economy must diversify beyond oil post-coronavirus

After such an economic tsunami, experts believe we need root and branch reconstruction to diversify beyond tourism and oil, writes Scott Macnab

A family walk along an empty Buchanan Street in Glasgow city centre after the coronavirus lockdown saw much of the country's shops close. Picture: John Devlin

Lockdown fever may have left Scots craving a return to normality and some glimmer of hope for an end to the stay-at-home coronavirus restrictions which have brought everyday life to a standstill. But as Nicola Sturgeon prepares to set out her exit strategy framework from the nationwide crackdown on movement, it is now clear that the old way of life has gone, perhaps forever.

It is likely to be up to a year, maybe longer, before the restrictions which have marked this pandemic are fully relaxed. Not until a vaccine or effective drug treatment emerges. Some experts have even suggested the aftermath of this public health crisis is akin to recovery from a natural disaster and the rebuilding process will be every bit as arduous.

Tax rises may be likely further down the line to foot the bill for the massive emergency bailout of the economy and the public may also have to get used greater monitoring of their movements as part of a the new “trace, trace and isolate” approach which will be the bedrock of the next stage of battling the pandemic.

Scotland's high streets were already struggling before the coronavirus lockdown began

And what will be left to go back to? Large swathes of the economy have been brought to a standstill and the economic impact on jobs and GDP is likely to be devastating. About three-quarters of Scots firms warned they won’t survive six months under the control lockdown conditions in one recent survey, with predictions last week from the Office for Budget responsibility suggesting that up to 170,000 jobs could be lost north of the border. Some of the biggest names in High Street, such as Debenhams, Oasis and Warehouse, have already filed for administration as the enforced closure takes its toll. As the number of cases of the virus starts to stabilise four weeks into the lockdown and other European nations, such as Italy and Spain, gradually ease restrictions, the Scottish public has become impatient for some plan to see us emerge from lockdown here.

The First Minister will address the issue this week, but those expecting any firm timetable will be disappointed with the lockdown likely to continue well into June. What we do know is that Scottish Government officials are looking into the prospect of a phased return to normality from the draconian measures imposed for the current lockdown, that have included the household isolation of symptomatic people, school closures, social distancing for people outside, stay-at-home advice and the shutdown of non-essential workplaces.

The first option under consideration is the possibility of schools reopening, with under-15s largely unaffected by the virus. This will be good news for parents, but there may be resistance from teachers who won’t have the same broad immunity as their teenage pupils.

“It is difficult to see how schools could re-open in circumstances where the current social distancing regulations remain in place or ahead of a significant increase in testing and tracking to control the spread of the virus,” said Larry Flanagan, general secretary of the EIS teaching union.

“Parents are unlikely to send children to school unless they are reassured about safety and there are potentially huge logistical challenges if teachers themselves are required to self-isolate or are infected in any significant numbers.”

And even when the current stay-at-home directives begin to lift, many restrictions will remain in place for Scots going about their everyday lives. Social distancing is likely to remain and a new vigorous approach to “test, trace and isolate” new cases will be adopted in Scotland to keep the virus in check. This will involve new technology, Sturgeon told her fellow Holyrood leaders last week. But she has conceded that this may give rise to privacy concerns.

A new NHS app being devised south of the border employs bluetooth technology and allows users who become unwell with Covid-19 symptoms to send an alert anonymously to other app users they have been in significant contact with in the previous days allowing them to get tested. But it has already prompted concerns over claims that ministers could “deanonymise” device IDs to identify users.

Civil liberties group Liberty says the app is tantamount to sharing “highly sensitive personal information” and represents a significant invasion of privacy.

“There has been a concerning lack of transparency over the serious threat to our rights raised by the NHSX app project,” says Liberty’s policy and campaigns officer Nadia O’Mara.

This could pose a problem for the Scottish Government, which suffered a bloody nose over its recent move to axe jury trials as part of a drive to speed up the court system and avoid a backlog. Ministers were forced to climb down after a backlash from lawyers who cited human rights infringements. But with this technology likely to provide such a critical tool in the battle against the virus and escape from lockdown, it may be that the public health imperative outweighs civil liberties concerns.

The real Herculean task ahead centres on reviving the economy. Millions of workers have been stood down as workplaces around the country have been mothballed to counter the pandemic. Industry leaders admit that a whole new approach to business may be needed when activity is finally fired up.

“We’re well aware that a return to ‘business as usual’ is highly unlikely,” says CBI Scotland director Tracy Black.

“That means we need to give serious thought to the kind of economy we want to build for the future.

“For Scotland especially, that means a relentless focus on boosting productivity, protecting competitiveness and preparing for technological change and changes to the way we work to spur resilience and safeguard our workforce for decades to come.”

Tourism is one of the key drivers of the economy, but the sector is now at “ground zero” according to one leading industry figure.

“It definitely won’t be the same as before – there will be a lot of different gaps ,” says Marc Crothall of the Scottish Tourism Alliance.

Hotels may re-open but if key links in the supply chain, like laundry services, are not up and running, it could undermine the whole operation. The prospect that some firms will go to the wall is inevitable.

“The demand is not going to be significant enough that there will be something for everybody,” Crothall added.

Scotland could be worse hit than elsewhere in the UK given the nature of the country’s economy. As well as tourism, the North Sea oil and gas sector has effectively ground to halt under the lockdown.

“We’ve seen predictions of employment being much worse in Scotland and I would think that is because we are disproportionately dependent on tourism and oil,” says economics Professor Ronald MacDonald of Glasgow University.

The price of oil has taken another huge hit as demand tumbles during the lockdown and it comes hot on the heels of widespread cuts and redundancies in the North Sea sector after the last price crash in 2015.

“I think we’re going to see that effect again in terms of employment in Scotland, so I would think we would be disproportionately affected relative to the rest of the UK,” says MacDonald.

“There’s a message there going forwards that I think we have to learn from this and I think we have to diversify our economy.”

That need for Scotland to “reset” after the outbreak is widely held among industry leaders. Finance Secretary Kate Forbes will this week unveil details of a new task force aimed at reviving business activity north of the border when the lockdown lifts. But the crisis does appear to have exposed the weakness of Scotland’s economy, particularly the lack of a solid manufacturing base. Compare us with a country like Germany, which has been able to speedily ramp up production of test kits and protective equipment, while Scotland and the rest of the UK have been heavily reliant on foreign supply chains.

“One of the ways out of this is to refocus our production,” says David Gibbons-Wood, a lecturer in economics at the Robert Gordon University.

“The crisis itself is identifying some of the weaknesses we’ve got in terms of production. We’re heavily reliant on masks and gowns and ventilators coming from abroad. Even some of the tests for antibodies are coming from China.”

The lack of diversification in Scotland’s economy should be one of the key lessons from the pandemic, MacDonald agrees. “If you look at the crisis we’ve had in obtaining testing for the virus then countries that have maintained their pharmaceutical manufacturing are much better able to do that, for example in Germany. We do need to rethink that.”

The scale of the challenge is certainly unprecedented and it may be that government strategists could adopt a radical mindset to tackling the aftermath.

“The other way of thinking about this is like it’s a natural disaster,” says Gibbons-Wood.

“The UK is quite fortunate we don’t have very many earthquakes or tsunamis, but you could maybe see that it could be like a natural disaster.”

The £330 billion cost to the public purse of the emergency grant funding to prop up businesses which have been forced to close and furlough workers – which sees the government pick up the tab for 80 per cent of their salary – has been unprecedented in modern times.

Higher spending levels may well emerge on the other side for the NHS and the care sector in particular, with public and political pressure likely to demand that carers and nurses are justly rewarded for their efforts in battling the virus

It is likely to mean tax rises further down the line to cover the costs.

The alternative could be a fresh wave of austerity cuts to balance the books, but this would be a mistake, according to Prof MacDonald.

He also warns against imposing any 
tax hikes too soon on a recovering economy.

“I think it would be a case of taking it as you go, as we did in the post-war period when we would be facing similar debt levels as we’re going to face after the pandemic.”

The relationship between the Scottish Government and business leaders has been frosty at best during this pandemic. Sturgeon has taken a more hardline approach to the shutdown than elsewhere in the UK.

Building sites north of the border have been ordered to cease operations unless they are working on NHS facilities, while those south of the border have been allowed to stay open if social distancing is employed. There was also consternation with ministers in Edinburgh over their handling of a small business grants scheme. In England the grants were provided to firms for every property they had – so a coffee shop owner with four establishments would receive £100,000. In Scotland the grant was awarded on the basis of each business, so the same coffee shop owner would only have received £25,000. Forbes performed a partial volte-face last week, but business leaders now say a clear strategy is required from government to help navigate them through the universe of uncertainty this crisis has presented.

“An exit strategy with some form of timeline will enable businesses to implement safe working procedures as well as forward plan to try to mitigate some of the longer-term effects that the crisis is having on their cashflow, revenue and their ability to sustain jobs,” says Liz Cameron, chief executive of the Scottish Chambers of Commerce.

Firms are facing a “catastrophic decline” in cashflow and revenue stream with no customers coming through the door. Cameron adds: “The health of our people is paramount, but the health of the economy – which underpins our wellbeing in so many ways – can only be achieved if we can start getting back to work.”

Indeed, the restart strategy may be even more fraught with danger than that of the shutdown, according to many in business. “There’s a fear that some firms that have survived this difficult period might struggle in its aftermath if we don’t manage circumstances carefully,” says Andrew McRae, FSB’s Scotland policy chair. “We’ll need bigger firms and consumers to continue to support smaller firms for the foreseeable.”

Many firms also complained of “ambiguity” in the guidance provided to them during the lockdown, which left many in the dark about whether to stay open or not

“There’s no room for interpretation in the re-start,” warns McRae.

“Local businesses will need clear instruction about how and when they should operate.”

It all points to a future landscape very different from what we are accustomed to – and will need a new way of thinking from ministers at Holyrood. Worryingly this flexibility of approach has not been a hallmark of the two decades of devolution so far, according to the former Scottish Government adviser Professor John McLaren.

“Planning for change and increasing capacity to allow for well managed change needs to start early,” he says.

“In 20 years of a Scottish Government such radical change has not been a high priority. Maintenance of the status quo has usually been preferred. That will need to change.”