James Alexander: Blueprint for Scottish growth

THE events of the past week inevitably have led to reflection and discussion on the factors behind the evolution of the constitutional debate in Scotland over the past 30-40 years.

As a broad-based, non-political organisation which seeks to encourage sustainable economic prosperity for Scotland – since its inception in 1931 – the Scottish Council for Development & Industry (SCDI) has always been and remains impartial in these debates.

We have, however, sought to communicate views from business and civic Scotland, and ensure that there is a strong focus on the long-term priorities for the economy. It is possible to identify where the debate has changed and the themes that have been consistent across the decades.

In the mid-1970s, commenting on the UK government’s devolution proposals, SCDI’s principal concern was reversing the loss of decision-making functions from Scottish industry to London, especially in manufacturing. We highlighted that “the critical industrial issue for Scotland today is Scotland’s ability to generate and to originate new enterprises, and to keep and develop indigenous companies”, with the “new situation created by vast offshore oil reserves” opening up a particular opportunity to attract the head offices of oil companies.

By the mid-1990s – invited by the Scottish Constitutional Convention to represent members’ views – a greater emphasis on improving education and training, maintaining competitiveness and increasing Scotland’s profile in Europe and worldwide, is evident. There was increasing recognition of the “ever-extending commercial lifetime of the North Sea”, the “potentially lucrative future for energy service firms” in exports and “the new west of Shetland opportunity” and, when incentivised, of Scotland’s “remarkable potential” for significant growth in and exports of renewable energy.

As with those debates, SCDI is today making an impartial and evidence-based contribution to the constitutional debate. In responding to our members’ desire for clarity among the mass of data and commentary, we have worked to collate the views of a wide range of experts and policymakers and inform the constitutional debate on the key economic issues.

Based on the long-term economic priorities in our Blueprint for Scotland, which sets out SCDI’s vision for achieving a prosperous economy, SCDI has today published three high-level reports focusing on macro-economic and fiscal sustainability, energy, and Europe and international. These reports have been informed by in-depth discussions with a wide range of organisations and sectors with input from business and civic leaders and experts. Each report objectively summarises a wide body of evidence from many sources and uses this to ask a number of crucial questions to all sides of the referendum debate.

While discussion often centres on the relative size of the gap between public expenditure and revenues, SCDI’s macro-economic and fiscal sustainability report shows that such a gap has persisted for both Scotland and the UK. Successive governments have relied on borrowing to close the gap, but this model depends on the availability and confidence of lenders. The recession has significantly reduced the long-term productive potential of the Scottish and UK economies and it is now estimated that UK national income will be 13 per cent lower in 2016-17 than it was projected to be in 2008.

While the UK’s fiscal consolidation plan is forecast to reduce public debt from 2017-18, in the longer term – as with many western economies – it is projected to grow again in the face of multiple pressures, including economic competition, an ageing population, climate change, inequality, and declining revenues from oil and gas production and environmental taxes. As a result, SCDI is asking how Scotland’s fiscal gap can best be closed. What can be done to stimulate sustainable economic growth, particularly where Scotland’s performance has been weakest, such as entrepreneurship, business research and development, and innovation? What fiscal levers could most improve business growth and what would be the trade-offs between tax competitiveness, public investment and the costs of doing business across the UK? What can be done to ensure that Scotland benefits from competitive rates of borrowing from financial markets? And how could currency arrangements affect Scotland’s ability to deliver on this agenda?

It is widely agreed that the Scottish and UK economies need to rebalance from domestic consumption to net higher exports. SCDI believes that Scotland should aim to double the value of its exports over the decade to 2020. Scottish exports grew strongly in 2011, yet net trade made a negative contribution to UK GDP in 2012 and the Office for Budgetary Responsibility forecasts net trade to contribute just 0.1 percentage points to UK GDP growth in each year to 2017.

The Europe and international report asks what can be done to grow substantially the value of Scotland’s exports to developed and emerging markets and attract high levels of investment. What is the most effective way of supporting trade via overseas representative networks and international trade relationships and agreements?

As the European Union is Scotland’s largest overseas market, what is the best way for Scotland and its key industries to maximise their influence? And, if Scotland votes to become independent, what should the Scottish Government’s priorities be in negotiations on membership terms and any transition?

A comparative advantage of the Scottish economy is its globally competitive energy assets and industries. Oil and gas investment is expected to be a record £13 billion in 2013, while investment in renewable energy in Scotland doubled to £1.5bn in 2012. However, these headline figures should not obscure challenges. The North Sea is a mature basin and production costs are high by international standards. An investment hiatus could seriously curtail its life expectancy and undermine efforts to anchor the oil and gas supply chain in Scotland as exports approach 50 per cent of its £16bn annual sales.

Annual investment in renewables needs to jump to £6-7bn to achieve the Scottish Government’s renewable electricity target for 2020, but increasing uncertainty, particularly on financial support mechanisms, is threatening investment in the UK and across Europe. There are windows of opportunity that cannot be missed if the long-term potential of oil and gas and renewables production and services in Scotland are to be maximised.

The energy report asks what can be done to sustain and increase investment. How can we support the supply chain and ensure access to required skills? On oil and gas, what can be done to enhance recovery rates, reinvigorate exploration success, and facilitate the sharing of infrastructure? How can the fiscal conditions that the industry needs be best achieved and, to avoid premature decommissioning, how can it be assured on the future availability of funding for tax reliefs from government?

On electricity, what aspects of the current regulatory framework incentivise or disincentivise investment in Scotland? What could be the demand from the rest of the UK and Europe and on what terms might they financially support low-carbon electricity generation in Scotland? What can be done to avoid the costs damaging Scotland’s industrial competitiveness and leading to higher levels of fuel poverty?

We believe the questions we have asked need to be constructively addressed to ensure the debate on Scotland’s future is as well-informed as possible.

Looking forward, the key challenge for Scotland is to stimulate investment and economic growth. Both sides need to think of the long term, recognising the opportunities and constraints of an increasingly interconnected world.

• James Alexander is senior policy manager for the Scottish Council for Development and Industry