N 56 Objectives & Summary by Paul Morris

OBJECTIVES & SUMMARY

Scotland Means Business

N-56: FOUNDING STATEMENT N-56 is about examining and promoting the fundamentals of Scotland's investment case and stronger and more sustainable economic growth. Opening with a study of Scotland's current financial position, cash flow and balance sheet strength, we apply the lessons learnt to identify ways to stimulate business, investment, jobs, value and wealth in a sustainable way for the common good. By learning from the most successful economies around the world, our aspiration is to excel beyond the level of their achievements. We believe that the higher the ambition and expectation, the higher the achievement â&#x20AC;&#x201C; always. We offer an ambitious but realisable plan that is designed to suit Scotlandâ&#x20AC;&#x2122;s own special circumstances. The purpose of N-56 is not to make a case for a yes or a no vote at the referendum. However, we all believe Scotland's economy is a good investment and in its potential to do better. To realise its potential, Scotland should address the core problems and opportunities rather than responding to symptoms. The route to further economic success is a focus on expanding the private sector, growing productivity, population and participation. N-56 wants to facilitate a culture in which the private sector truly works alongside government, the public sector and communities, in the interests of establishing and implementing a strategy from which society as a whole can benefit and prosper. Indeed, we believe this culture is more important than any individual policy. We table this national plan for business and the economy as a route to a more prosperous future for all. In doing so, we acknowledge that business should not exist detached from wider aspects of modern society, not least in addressing the persistence of ever greater inequality, which in turn limits economic growth.

FOREWORD – DAN MACDONALD We live in a period of unprecedented global economic change and opportunity. It's important that all major stakeholders including business and government come together to ensure that Scotland can benefit fully from an overarching and comprehensive strategic economic plan that addresses how we will adapt to the opportunities and challenges of a new world. That’s why, some 15 months ago, I commissioned a diverse and international group of independent economic experts to research and outline a plan for Scotland's economy that is fitting for unparalleled global change. The resulting reports, Scotland Means Business: The Facts and Scotland Means Business: The Strategy do just that: examining our economy as an investment proposition and offering a challenge to business, communities and government to realise Scotland’s economic potential, in the interest of all. They demonstrate that, though Scotland does have a strong economy, a new comprehensive strategy is urgently required. We can realise our greater potential by taking lessons from the very best international examples of business and economic development and establish a participatory culture, whereby moulding and establishing policy is not left to government in isolation. Business must step up to the mark. N-56 is a step toward creating an all-encompassing economic plan. The initiative seeks to provide a new locus for Scotland’s business community to work with government and others throughout the country, to plan a more prosperous future for the whole of Scottish society. I believe it is crucial that we establish a collaborative culture between business, government and others, where trust is generated and nurtured, so that together we can design and implement the very best policies that deliver step-change in Scotland’s economic prospects. Doing that requires us to cast down the ivory towers and steel silos that hinder Scotland’s development to forge a new attitude, informed by the examples of our strongest performing international competitors. Working together is the first principle of good sense in any business environment; not least the business of growing a successful world-leading economy. The objectives of N-56 will succeed if we can harness the input and energy of the very best in our business community, from budding young entrepreneurs to the businessmen and women leading today’s top companies. I am already immensely grateful to the entrepreneurs and business leaders throughout Scotland who have contributed to the Scotland Means Business reports. I am confident that with the adoption of the right plan and policies, those objectives are entirely achievable and Scotland can through a re-established global brand be among the league of the five wealthiest and healthiest nations in the world. If you share that collaborative vision I would urge you to contact N-56 and get involved. Dan Macdonald, Founder, N-56, June 2014 www.N-56.org

N-56 Objectives & Scotland Means Business Summary

FOREWORD – GILES HAMILTON The N-56 initiative and the Scotland Means Business reports offer a new approach to the challenges and opportunities that this country face in the years ahead. My role as a CEO and chairman of emerging technology companies, working in the UK, the US, the Middle East and Australia over the past 20 years, has taught me that business success must be based on a willingness to learn and adapt to best practice from around the world. The lessons are clear if we look for them. In the international medical technology sector in which my own business currently operates, it is the small countries which manage to leverage the growth of their research and technology bases to generate employment and contribute to economic growth that ultimately catch up with - and overtake - the performance of their rivals. That innovation-based approach is one followed by small economies as diverse as those of Singapore and Ireland, and it is just one of the themes examined in detail by the Scotland Means Business reports. These reports, authored by leading UK and international economists, provide a powerful independent analysis of Scotland’s current economic performance and explore what business leaders, policymakers and wider society could do going forward. Crucially, they look beyond the usual comparisons that are often made about Scotland’s performance relative to the rest of the UK. Scotland needs to innovate and the best way to do that is to look outwards at the most relevant examples of successes from elsewhere in the world, and ask ourselves what we are doing that’s different and what we can do in future that could help us perform better. The answers are not simple. Like any strong business proposition, Scotland has enormous potential to do better, but we must openly and honestly address core challenges, including the need to improve social outcomes and reduce inequality. Yet the opportunities that do exist, and which are detailed in the Scotland Means Business reports are tremendously exciting. We have existing and potential competitive advantages in a range of global growth export-based sectors, from energy services, to life sciences; food and drink to insurance and financial services. The key to success however, is to harness a new ethos of collaboration, between business leaders, policymakers and the rest of society, to ensure that the economic and social potential of Scotland is unlocked to the full. This marks a clear opportunity for business leaders across Scotland to get involved. I would therefore urge others to join in, first by reading and understanding the Scotland Means Business reports; and then to consider getting more involved in the new N-56 initiative to build on their findings and drive forward their objectives. Giles Hamilton, CEO, AccuNostics

N-56 Objectives & Scotland Means Business Summary

CONSULTEES The initial Scotland Means Business work programme commissioned by N-56 would not have been possible without the contributions of many of Scotland’s business leaders. Some wished to remain anonymous but others were happy to have their name listed: •

Christian Albuisson, Montanaro

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Tony Banks, Balhousie Care Group

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Liz Cameron, Scottish Chambers of Commerce

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David Doig, Opito

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Doug Duguid, Enermech

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Hugh Fraser, Andrews Kurth UAE

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Giles Hamilton, AccuNostics

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Alex Hammond-Chambers, former Chairman, Ivory & Sime

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Bobby Hill, Hydracrat

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Simon Howie, Simon Howie The Scottish Butcher

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John Innes, Entrepreneur

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Dan Macdonald, Macdonald Estates

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Marie Macklin, Klin Group

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Angus MacPherson, Noble Group

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Ross Martin, Scottish Council Development and Industry

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Martin McAdam, Aquamarine Power

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Jim McColl OBE, Clyde Blowers

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Frank McKirgan, London Fund Manager

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Professor Andy Porter, University of Aberdeen and Grampian BioPartners

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Sir Brian Souter, Stagecoach Group

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Angus Tulloch, Edinburgh Fund Manager

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Michael Turner, Aberdeen Asset Management

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Mike Wilson, Ecosse Subsea

N-56 Objectives & Scotland Means Business Summary

N-56 AND SCOTLAND MEANS BUSINESS BACKGROUND & OBJECTIVES

N-56 Objectives & Scotland Means Business Summary

Background N-56 is an initiative by business leaders in Scotland to produce and promote a new economic strategy for Scotland as one of the world’s leading economic success stories. The context for the initiative is the debate over Scotland’s constitutional future. However, N-56 does not seek to make a case for voting either yes or no in the referendum. Its focus is firmly on articulating the range of economic policies and actions that will attract investment and improve economic performance. The business leaders contributing to the initiative agree the Scottish economy can compete with those few countries that have the highest economic output per person and also top the rankings of wider measures of economic and social development. A founding principal for N-56 is that the private sector has a responsibility to engage constructively in the debate on the future of the Scottish economy. Business must be proactive by setting out perspectives and ideas on how economic performance can be improved. No matter where or with whom the economic powers rest, business should express a view on how they are best used to address Scotland’s distinctive economic and business challenges and opportunities. As a business-led initiative, N-56 goes beyond an analysis of government economy management and policy, to consider where the growth opportunities might be and the factor conditions required to realise those opportunities. The initiative is also considering how businesses can work collaboratively with government and others in the common interest to develop and implement the policies that can deliver economic success in Scotland.

Objectives The objectives of N-56 are to: •

provide an independent analysis of Scotland’s economic performance and potential;

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promote a culture of collective strategic decision-making about what is best for Scotland’s economy;

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raise the level of the debate on Scotland’s economic future;

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ensure that the debate is open, inclusive and informed by a wide range of stakeholders;

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engage businesses from all sectors of Scotland’s economy in the debate and bring focus to the importance of the private sector; and

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learn from international success stories.

This will allow us to move the economic debate from a discussion of economic powers for Scotland (constitution) to what should be done with those economic powers (policy), thinking beyond the referendum. N-56 Objectives & Scotland Means Business Summary

Work To Date The work programme for Scotland Means Business, commissioned by N-56, started in the spring of 2013 and has involved a significant amount of research including: •

analysis of UK and Scottish economic performance, strategy and potential;

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research into best practice examples of policy and policy making structures and processes in other successful economies; and

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an extensive programme of consultations with business leaders in Scotland.

The output from the first phase of work, Scotland Means Business: The Facts, analyses issues such the UK’s and Scotland’s economic performance, the state of public finances, the performance and economic policies of successful small advanced economies and the future potential of the Scottish economy, including growth sectors and factor conditions such as infrastructure and skills. A second report, Scotland Means Business: The Strategy, sets out a range of policy proposals and approaches to economic policy making that will help to ensure that Scotland can fulfil its potential as one of the best performing economies and societies in the world. The policy ideas presented are not intended to be a definitive and final set of proposals for Scottish economic policy. Rather, they are initial proposals for stimulating successful Scottish businesses that represent a first draft of a new economic strategy for Scotland, which should be constantly reviewed and developed over time, using the corporative policy making and implementation structures recommended in this report. The main findings from Scotland Means Business: The Facts and Scotland Means Business: The Strategy are summarised below. The full reports provide further details on all of the data quoted, and the sources.

N-56 Objectives & Scotland Means Business Summary

The Scotland Means Business reports have been prepared for N-56 by a study team that includes:

This report has been prepared by BiGGAR Economics, with contributions from all of the study team members â&#x20AC;&#x201C; and from a number of Scottish business leaders. www.n-56.org

N-56 Objectives & Scotland Means Business Summary

SCOTLAND MEANS BUSINESS: THE FACTS SUMMARY

N-56 Objectives & Scotland Means Business Summary

THE FACTS: EXECUTIVE SUMMARY Scotland is a wealthy country. However, Scotland has the potential to do better, to become one of the top five wealthiest places in the world, economically and socially. While the Scottish economy has performed relatively well in comparison with other UK regions and the UK as a whole, its long-term growth rate has lagged behind the leading small advanced economies, by half a percentage per year. While that may seem like a marginal variation, it makes a significant difference over time. At the same time, the UK’s manufacturing base has declined by more than other comparable economies, its financial sector has become proportionately larger, and it faces significant challenges in improving social outcomes and reducing inequality. Leading small advanced economies include the Nordic countries and lower tax countries such as Singapore and Ireland. While there is no single economic template that works for these small advanced economies, there are common features that provide lessons for Scotland. The successful small advanced economies exhibit high levels of trust and a shared sense of purpose, which provides a basis for achieving consensus, with business and others collaborating with government to form policies that reflect local circumstances and local preferences. It is common for all areas of policy to be aligned in pursuit of specific competitive advantages (for example, in particular sectors of the economy) and for responses to challenges and opportunities to be rapid and decisive. The Scottish economy has existing and potential competitive advantages in niches of many of the global growth sectors. Oil and gas will continue to be important, increasingly as an exports-based sector. Other opportunities include offshore renewable energy, high quality food and drink, life sciences, insurance and fund management, education, tourism and the creative industries. Increasing exports in areas of comparative advantage will drive productivity increases, making a step change improvement in economic growth. Scotland’s public finances are stronger than those of the UK, not least due to the contribution of the oil and gas sector, with Scotland’s share of UK tax revenues matching Scotland’s share of UK spending. The public sector in Scotland as a percentage of the total economy is average for an advanced economy and more than three-quarters of jobs in Scotland are in the private sector. Scotland also has the factor conditions required for growth, not least the highly skilled workforce. A more strategic approach to infrastructure investment is also required to deliver the conditions for growth. There is no doubt that Scotland’s economic potential is huge. Learning the lessons from small successful economies, taking a corporative approach to policy making so that policies are aligned to realise Scotland’s competitive advantages, can deliver significant economic and social benefits.

N-56 Objectives & Scotland Means Business Summary

UK and Scottish Economic Performance and Strategy The starting point of a debate on Scotland’s long-term economic and constitutional future should not be short-term economic concerns but longer-term trends in performance and potential. One hundred years ago, the UK was the wealthiest country in the world in terms of GDP per capita (economic output per person) and Scotland, as a centre of manufacturing and trade, was of central importance to UK economic success. However, the last century has seen relative economic decline and a shift in the economic centre of gravity: •

the UK’s relative economic decline (from 1st to 18th amongst advanced economies, and 22nd if all economies are included) has been part of a pattern that has seen convergence amongst advanced economies. However, the UK decline has been steep with output per person now only average for an advanced economy;

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there are a wide range of other indicators of economic and social performance. The UK ranks strongly amongst advanced nations for economic competitiveness and innovation. However, in other areas the UK ranking is much weaker, in particular for human development, equality and sustainable development;

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over the last four decades UK economic policy has encouraged the development of the financial services sector, with the City of London positioned as a global financial centre. Meanwhile, the contribution of the manufacturing sector to the UK economy has declined more than any other advanced economy, from 30% of the economy in 1971 to 10% in 2008;

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the UK’s economy is also geographically imbalanced. The South of England accounts for more than half of UK output and the UK has the largest difference between its richest and poorest regions in Europe.

Scotland is a wealthy country in terms of economic performance, but should be performing better. More specifically: •

Scotland has higher levels of GDP than the UK with the 14th highest level of GDP out of 35 advanced economies (34 OECD countries plus Scotland);

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Scotland’s long-term rate of growth in GDP per capita has lagged the UK by 0.33% and small Northern European economies by 0.5%, on average, per year;

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Scotland has a lower level of entrepreneurship than the UK (70% of the UK’s, ‘total early stage entrepreneurial activity’ (TEA) rate) and has not matched the UK’s recent increase TEA rate;

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Scotland is consistently one of the UK’s strongest performing regions for attracting inward investment projects.

The economic strategies that have been followed by the current Scottish Government and by the previous Scottish Executive both contain high quality analysis of Scottish economic challenges and opportunities. However, the scope of the strategies has been limited to those areas where powers have been devolved to the Scottish Parliament. N-56 Objectives & Scotland Means Business Summary

International Lessons The tendency for Scotland’s economic and social performance to be benchmarked against that of the UK as a whole, rather than the best performing economies, can lead to complacency. A more ambitious approach would involve learning lessons from the most successful economies in the world. Many of Scotland’s most relevant benchmarks are small advanced economies (OECD members with a population of less than 10 million). The performance of small advanced economies benchmarks well against larger advanced economies on a range of economic and social measures: •

they have maintained their share of global GDP over the past few decades while larger advanced economies have experienced reducing GDP share;

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many have generated strong growth in exports and outward investment, are frequently at the innovation frontier and are well-represented at the top of international rankings of competitiveness;

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at the same time, many have generated strong social performance – on measures from quality of life to income distribution;

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however, there is a broad distribution of outcomes. Not all have done well;

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the overall strong relative performance continues. Small advanced economies seem to be adapting well to the process of intense globalisation. Although they had a significant exposure, they have generally responded well to the global financial crisis.

The lessons that can be drawn from these successful small advanced economies include: •

small countries have benefited from a supportive international environment, as well as from several domestic characteristics. Small countries that have invested in international engagement and on sustaining social and political consensus have done well;

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at least as important are the policy choices made. Small country success is as much about policy specifics as the deliberate approach to economic policy. They aim to align policy to position the economy to compete in the global economy;

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small countries are not scaled-down versions of large countries and successful small countries set policy to respond to this local context. It is not enough just to have ‘good policy’;

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the international environment is becoming more challenging and complex. Small economy governments need to ensure that they invest in strategic agility: clear competitive positioning, the ability to move quickly in response to a changing environment, and building resilience.

Scotland has many of the attributes that other small advanced economies have, but could learn lessons from the most successful on how to pursue a coherent, integrated economic strategy.

N-56 Objectives & Scotland Means Business Summary

Public Sector The future of the Scottish economy will depend mainly on the competitiveness and performance of the private sector. However, the contribution of the public sector will also be important, particularly to social outcomes. Analysis of UK and Scottish public finances finds that: •

Scotland has 8.3% of the UK population but gets 9.3% of government spending, meaning that public spending per person is about 10% higher in Scotland than the UK average;

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in the period since devolution, Scotland’s share of UK government spending has been equal to its share of taxes collected (in some years there has been a surplus with the rest of the UK and in other years there has been a deficit);

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tax revenues in Scotland include Scotland’s geographic share of North Sea oil and gas revenues. As these revenues decline over the next 30-40 years, the resulting gap will need to be filled – we suggest by increasing tax revenues as a result of economic growth – whether Scotland is independent or part of the UK;

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since 1980, Scotland has, on average, had a public sector surplus (tax revenues have exceeded government spending). Had Scottish public finance accounts been managed separately from UK public finances over the last 30 years, it is likely that Scotland’s public finances would still be benefitting from a significant cumulative surplus.

Broader findings on public spending and services are that: •

London accounts for 1 in 8 of all UK public sector jobs and has higher levels of public spending than other parts of the UK (apart from Northern Ireland);

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60% of government spending in Scotland is by the Scottish Government and local councils (including health and education), with 40% by the UK Government (including social protection and defence); total government spending in Scotland is around £65 billion, around £12,000 per person;

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defence accounts for a large proportion of UK public spending, the 5th highest of all advanced economies, more than double the level in smaller European countries;

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government spending is higher in Scotland than the UK when measured per person, but is the same as a proportion of the economy. At 45%, government spending does not account for a particularly high share of the Scottish economy and the state is considerably smaller than in many other small successful European economies.

The current tax system in the UK (and therefore in Scotland) is both highly complicated and highly centralised. The complexity and centralisation of the system contributes towards the high loses of revenue associated with tax avoidance, tax planning and tax evasion. The Mirrlees Review has recommended significant changes in the UK, few of which have been implemented, and Mirrlees has worked with colleagues on the Fiscal Commission on how reform could be implemented in a Scottish context. Tax reform is a potential source of significant competitive advantage for the UK and/or Scotland.

N-56 Objectives & Scotland Means Business Summary

Private Sector Scotland has global comparative advantage in a number of fast growing sectors, examples include: •

Scotland has just 1% of the EU’s population but 25% of the EU’s wind and tidal power resources and 10% of wave power resources. It can be conservatively estimated that at least 31,500 new renewable energy jobs will be created in Scotland by 2020;

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Scotland has a worldwide reputation for producing premium food and drink products. In 2012, exports of these products amounted to £5.3 billion;

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Scotland is home to one of the largest life sciences clusters in Europe, with particular strengths in areas such as regenerative medicine and animal health;

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five Scottish universities rank amongst the top 200 in the world meaning that Scotland has more top universities per capita than any other country. The universities should be regarded as a growth sector in their own right, as well as a source of human and intellectual capital for other sectors of the economy;

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Scotland is slightly less reliant on financial services employment than the UK as a whole but has real strength in niche areas such as fund management and insurance. It is the 4th largest asset management centre in the EU.

The oil and gas sector makes a significant contribution to the Scottish economy, providing 13% of output and more than 10% of private sector jobs. The level of production in the sector is volatile, since investment and production depends on oil prices. However, employment levels are less volatile and even without oil and gas, per capita output in the Scottish economy would be equal to the UK. The oil and gas sector is expected to continue to make an important contribution to the future performance of the Scottish economy: •

the export of oilfield goods and services is increasingly important, with exports now worth twice as much as whisky exports;

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most oil producing countries (developing as well as advanced economies) have established an oil fund in order to share the windfall with future generations. With very substantial future tax revenues, it is not too late for the UK or Scotland to establish an oil fund;

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while the UK Continental Shelf (UKCS) is a mature oil-producing region, there are very substantial remaining reserves. Future production might only be a third of that already produced from UKCS in volume terms. However, with oil prices on an upward trajectory, the value of future production could be as least as high as the value of production to date;

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the oil and gas sector has not received the policy attention that might have been expected given its contribution to the Scottish economy. A strategic focus on the sector (following the Norwegian model), with attention to building R&D capacity and export-led growth, could both increase recovery rates from UKCS and build on a globally competitive export sector.

N-56 Objectives & Scotland Means Business Summary

There are also differences between Scotland and the rest of the UK in trade: •

the UK’s share of global trade has been declining and the value of UK trade is now lower than the average large advanced economy and well behind Germany;

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the UK had a trade deficit of £33.9 billion in 2012. Excluding Scotland, the rest of the UK’s trade deficit would increase by 75% to £59.4 billion;

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Scotland has a small trade surplus with the rest of the UK and a trade surplus with the rest of the world, a total surplus of £25.5 billion. Without oil and gas exports (which account for less than 30% of exports), Scotland would have a trade deficit;

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Scotland’s total trade volume is equivalent to 129% of GDP, £35,229 ($55,772) per capita. This is lower than average for a small advanced economy and considerably less than the best performing small European trading economies.

Factor Conditions Factor conditions and circumstances that will be important determinants of future economic growth, in addition to the potential comparative advantages in global growth sectors, include infrastructure, human capital, innovation and equality. Infrastructure can be a driver of economic growth in advanced economies, where investment facilitates access to markets, the development of intellectual capacity and efficiency gains. However: •

UK investment in infrastructure has declined significantly from more than 7% of GDP in the mid-1960s to less than 2% now;

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over the last 20 years much investment in UK infrastructure has been supported by the Private Finance Initiative, incurring higher interest rate charges than traditional public sector borrowing;

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long-term real interest rates are at historically very low levels, making increased investment in infrastructure provision an attractive proposition;

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Ireland’s National Development Plan is a useful example of a strategic, consensus approach to prioritising infrastructure investment;

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priorities in Scotland might include investments that facilitate productivity growth such as transport, ICT and R&D investment.

In terms of human and intellectual capital, the evidence on Scotland’s position is mixed: •

the performance of Scotland’s school system means that it ranks amongst the top performing countries in the OECD but this performance has declined in recent years because the Scottish system has not improved as quickly as systems elsewhere;

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while changes are taking place in the school and college vocational education system, further change is likely to be necessary to tackle youth unemployment and provide the skills that will drive economic growth;

N-56 Objectives & Scotland Means Business Summary

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it is estimated that 71% of young people in Scotland participate in higher education compared to 63% for the UK as a whole and the 62% OECD average

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on average across the OECD, 31% of the adult population hold tertiary level qualifications. In the UK the proportion is 38% and in Scotland it is 42%;

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Scotland has more top performing universities per capita than any other country. Scotland produces 1.9% of the world’s top 1% of highly-cited papers and Scottish research has high impact on average in comparison with research from other countries including the UK as a whole;

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business expenditure on R&D in Scotland is very low by EU standards but this is compensated to some extent by relatively high R&D expenditure by universities. Overall expenditure on R&D in Scotland represents 1.56% of GDP, compared to 1.79% for the UK and 1.94% for the EU.

On the most commonly used measure of inequality, the Gini coefficient, Scotland has less inequality than the UK as a whole. However, inequality is a major problem for Scotland, with significantly higher inequality than other European countries of similar size. Inequality in Scotland affects everyone, not just the poorest. It is fundamentally an economic issue since addressing inequalities will provide human capital that will help to drive economic growth. There are a range of policy areas where growth can be enhanced and inequality reduced and addressing inequality also reduces the need for welfare spending, freeing up resources for investment.

Stimulating Growth Scotland Means Business: The Facts, provides the evidence base on which, Scotland Means Business: The Strategy has been developed. The factors that are important for economic growth include human capital, intellectual property and innovation, investment in capital and infrastructure and natural resources. Other important factors include good strategy that is kept under constant review, levels of trust and confidence. Productivity growth in Scotland had been lower than in the UK as a whole before the recession, but has since held up while UK productivity has fallen. Scotland has significant economic assets, but requires good quality economic policy if latent potential is to be realised. The constitutional future of Scotland will not necessarily, in its own right, make a difference to Scotland’s economic performance. However, the quality of policies will – policies that reflect Scottish circumstances and preferences would be expected to deliver better performance.

N-56 Objectives & Scotland Means Business Summary

SCOTLAND MEANS BUSINESS: THE STRATEGY SUMMARY

N-56 Objectives & Scotland Means Business Summary

THE STRATEGY: EXECUTIVE SUMMARY We live in a period of unprecedented global economic change and opportunity. It's important that all major stakeholders including business and government come together to ensure that Scotland can benefit fully from an overarching and comprehensive strategic economic plan that addresses how we will adapt to the opportunities and challenges of a new world. There are a number of significant economic challenges that need to be met, demonstrating the urgent need for change – and also providing opportunities. These include the unprecedented length of the current crisis from which the economy has yet to recover, imbalance in the UK economy with the dominant position of London and financial services, an ageing population, a consumption based economy with limited growth potential, climate change and lower levels of trade than prosperous competitors. N-56 believes that the overriding objective of Scotland’s new economic strategy should be to increase economic growth so that, over time, Scotland becomes one of the wealthiest five countries in the world, measured in economic output per person. This can be achieved through a set of policies that are designed to: •

increase economic participation: to match the employment rate of the top five advanced economies; and

deliver export-based growth: increase Scotland’s trade volumes to match the average for small advanced economies. A range of mutually reinforcing transformational strategies has been suggested by N-56 in the Scotland Means Business reports, as a starting point for the development and implementation of the new economic strategy. These include: •

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Exports: a new exports strategy including development of a Scottish brand, enhancing the productivity of exporters, learning from success stories such as oil services and whisky on sales and distribution channel development;

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Infrastructure: a new national development plan, including a substantial investment in infrastructure, which could be funded by a Scottish infrastructure bond, available on international bond markets and as a long term savings product in Scotland;

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Renewables: realising the economic opportunities by commercialising new generation technologies such as wave and tidal power, for global markets, as the Danes have done in wind turbines, including developing co-investment models;

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Growth Sectors: strategies to build competitive advantage in a range of other sectors where global growth niches exist, including tourism, transport, food and drink, creative industries, life sciences, universities and healthy ageing;

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Energy: building on the recommendations of the Wood Review, a range policy measures in support of the oil and gas sector, including exploration incentives, ensuring fiscal stability, stimulating R&D and investment, incentives for the relocation of corporate headquarters to Scotland, education and skills initiatives and development of the Scottish engineering brand;

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Human Capital: continued investment in the education sector including taking advantage of the highly skilled workforce that is associated with Scotland’s

N-56 Objectives & Scotland Means Business Summary

university and college system and labour market initiatives to promote high economic participation; •

Innovation: protecting investment in the existing innovation system and efforts to promote entrepreneurship to build longer term competitiveness in emerging sectors in the UK economy, including mechanisms to facilitate the provision of expansion capital, for long term growth;

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Entrepreneurship: ensuring that public policy is supportive of business-led advice and support initiatives, including a tax system with low business compliance costs and incentives for investment in new businesses; and

Taxation system: reforming the tax system that applies in Scotland, based on the Mirrlees recommendations for a simpler tax system. The reforms will learn lessons from others that have simplified their tax systems such as the New Zealand. Business Incentives: a range of specific tax measures in support of the transformational strategies. The menu of options include: •

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an allowance for corporate equity, removing the tax disadvantages of equity financing compared with debt. This would make Scotland an attractive location for equity providers and other financial institutions, support the equity model of long term business finance, help to address the impact in pension funds of the removal of advance corporation tax in the UK and encourage increased equity investment in growing Scottish businesses;

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increasing research and development support in key sectors such as oil and gas, financial services and renewable energy;

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targeted measures such as reducing VAT and air passenger duty to boost the competitiveness of the tourism sector;

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incentivising investment in high growth companies;

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incentivising investment in start-up and growing family businesses; and

favourable tax treatment of technology-based businesses that have the potential to become companies of scale. The new economic strategy for Scotland should be at the top of the hierarchy of policy, providing a framework for all other areas of policy and ensuring integration across all areas of policy. A corporative approach to policy making is required, starting with the development of the new economic strategy for Scotland, involving government, businesses and others working on both the formation and implementation of policy, in the common interest. A new economic strategy for Scotland, based on the corporative approach recommended by N-56 should result in policies more suited to Scotland’s needs, opportunities and preferences. This should lead to a more competitive, better performing Scottish economy. Increasing productivity to match the top quarter of advanced economies, increasing the employment rate to the average of the top five and halving the gap between UK and Scottish population growth, would increase GDP from the baseline of £145 billion in 2012 to £269 billion by 2037, an 86% increase over 25 years. This would also increase GDP per capita by two-thirds (by more than £18,000) to more than £45,000 per person. Accelerating economic growth would also improve the public finances, with faster growth leading to the elimination of the current deficit within seven years and then the generation of significant surpluses. •

N-56 Objectives & Scotland Means Business Summary

Need for a new, comprehensive economic strategy We live in a period of unprecedented global economic change and opportunity. It's important that all major stakeholders including business and government come together to ensure that Scotland can benefit fully from an overarching and comprehensive strategic economic plan that addresses how we will adapt to the opportunities and challenges of a new world. Six inter-linked economic challenges demonstrate the need for change and also the opportunities for change: •

Seven Lost Years: The recent economic crisis has been the longest lasting in modern times. The recovery from the 1930s depression required bold changes in economic strategy including the New Deal. A similarly radical change in strategy is now required;

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Imbalance in the UK Economy: The economic crisis has highlighted the extent to which London and the financial sector dominates the UK economy. A new economic strategy that meets the needs of Scotland will also address the current imbalances in the UK economy;

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Ageing Population: Scotland’s population is ageing faster than the UK’s (although an improving Scottish economy could change current demographic projections). Scotland will not be the only advanced economy to experience an ageing population and so products and services and public policies to address the challenge will be exportable;

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Consumption Based Economy: The unsustainable consumption based UK economy, with long term downward pressure on consumption associated with a need to save more to meet the pension needs of an ageing population, means that a new economic strategy needs to focus on global rather than domestic markets;

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Climate Change: Environmental considerations are an important influence on the formation of policy, in particular reducing carbon emissions. However, the challenges associated with climate change should also be considered to be business opportunities since products and services that reduce carbon emissions in the energy mix or deliver more efficient use of resources will be globally competitive;

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The Trade Gap: Scottish levels of trade are well behind some of the most successful small advanced economies in Europe and would need to increase by a third to match the average and, by 60% if oil and gas exports were excluded, some £94 billion in additional trade. The most successful small advanced economies have shown that this path to growth is achievable, if it is high enough as a strategic priority and supported with the right mix of policies.

The benefits of a new economic strategy for Scotland include providing a: •

framework that sets out Scottish needs, opportunities and preferences;

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long term perspective above and beyond the political cycle (at least in the many areas where there is a degree of consensus);

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framework that provides long term stability sought by investors;

N-56 Objectives & Scotland Means Business Summary

•

basis for prioritising scarce resources (including public sector resources) on the challenges and needs identified as strategic priorities;

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mechanism for the integration of policy;

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way to constantly review priorities and benchmark against leading economies.

Strategic Framework Businesses compete but governments provide the conditions that can make businesses competitive, or uncompetitive in the global demand for people, skills, technology and investment, all increasingly mobile resources. Scotland Means Business: The Strategy draws on academic research including that of Professor Richard Vietor of Harvard Business School who’s framework includes the need for a strategy, structures for its implementation and a range of macroeconomic and microeconomic policies designed to achieve strategic goals. Economic growth can be achieved by: •

increasing the quantity of resources (natural, human, technology, capital); and

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the efficient use of those resources (productivity).

Scotland Means Business has also learned lessons from strategies for other economies. These include the Chicago Growth Strategy, which identifies three drivers of growth (economic sectors and clusters, human capital and innovation and entrepreneurship) and two enablers of growth (physical and virtual infrastructure and public and civic institutions) and sets out ten, separate but mutually reinforcing transformational strategies. Scotland Means Business believes that the overriding objective of Scotland’s new economic strategy should be to increase economic growth so that, over time, Scotland becomes one of the wealthiest five countries in the world, measured in economic output per person. This is an ambitious but absolutely achievable target. The experience of successful businesses is that higher expectations and greater ambition leaders to better performance. This applies as much to the economy as a whole. The transformational strategies are based on creating the conditions for growth in the Scottish economy, primarily through two mechanisms: •

increasing economic participation: Scotland has a higher employment rate than the UK as a whole, but a lower rate than the top five advanced economies. Matching the average for the top five would imply an additional quarter of a million people in employment, based on the current Scottish population. Even with no improvement in productivity, this would imply an increase in GDP of some £15 billion; and

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export-based growth: Scotland’s trade volumes would need to increase by a third to match the average for small advanced economies (60% if oil and gas exports were excluded), some £94 billion in additional trade. Increasing exports is a credible strategy for the Scottish economy, since there are a number of existing and potential niches for Scotland in those sectors with the greatest global growth potential. Growth in trade would be a driver of

N-56 Objectives & Scotland Means Business Summary

economic growth, because it would both drive and result in the volume of factors of production (population and participation) and efficiency (productivity). The transformational strategies set out in Scotland Means Business: The Strategy are presented separately but are mutually reinforcing strategies. These strategies represent a business contribution to the development of a new economic strategy, which should be further developed and implemented in a collaborative way.

Transformational Strategies N-56 has identified a number of transformational strategies that have the potential to accelerate economic growth, by increasing exports and by increasing economic participation. These transformational strategies are a set of mutually reinforcing initiatives. They include: •

Exports: a new exports strategy including development of a Scottish brand and other measures to enhance the productivity of exporting or potentially exporting sectors through investment in infrastructure, research and development and education (including addressing skills gaps in languages). This will learn from success stories such as oil services and whisky on sales and distribution channel development;

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Infrastructure: a new national development plan, including a substantial investment in infrastructure, improving Scotland’s international and internal transport links and other areas of infrastructure including information and communications technologies. This investment can be funded by a Scottish infrastructure bond, available on international bond markets and as a long term savings product in Scotland;

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Renewables: realising the economic opportunities from renewable energy, using the opportunity offered by Scotland’s natural resources and the technologies emerging from the research and development base to commercialise new generation technologies such as wave and tidal power, for global markets, as the Danes have done in wind turbines. The immediate priority is to attract private investment and engineering expertise into the sector using a co-investment model;

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Frankfurt of the North: support for the financial services sector where long term growth opportunities exist, including the global growth markets for fund management. Measures include consistent regulatory and fiscal regimes, fostering financial services innovation through research and development tax credits, improving intermediate skills through an Apprenticeship system and a Financial Services Challenge Fund and an initiative to fund Scottish universities to examine how new technologies may radically alter the outlook for the financial services sector, and what can be done about it;

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Growth Sectors: strategies to develop and build on existing competitive advantage in a range of other sectors where global growth niches exist, including tourism, transport, food and drink, creative industries, life sciences and universities. There are also opportunities to build new sectors of the economy, to deal with public policy challenges; these include the potential development of a cross-sector healthy ageing cluster;

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Energy: building on the recommendations of the Wood Review, a range of macro and micro policy measures in support of the oil and gas sector,

N-56 Objectives & Scotland Means Business Summary

including exploration incentives, ensuring fiscal stability and a fiscal regime suited to a mature basin, stimulating R&D (as has happened in Norway), stimulating additional investment, incentives for the relocation of corporate headquarters to Scotland, education and skills initiatives and development of the Scottish engineering brand; •

Human Capital: continued investment in the education sector to ensure that the necessary human capital is in place. This includes taking advantage of the highly skilled workforce that is associated with Scotland’s internationally competitive university and college system and a range of intermediate labour market initiatives to promote high economic participation;

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Taxation: reforming the tax system that applies in Scotland, whether that means reform at the UK or Scottish levels (depending on the outcome of the referendum), based on the Mirrlees recommendations for a simpler tax system. The reforms will learn lessons from others that have simplified their tax systems such as the New Zealand example of the dividend imputation system to address double taxation of dividend income.

Business Incentives: a range of specific tax measures in support of the transformational strategies. The menu of options include: •

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increasing research and development support in key sectors such as oil and gas, financial services and renewable energy;

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targeted measures such as reducing VAT and air passenger duty to boost the competitiveness of the tourism sector;

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incentivising investment in high growth companies;

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incentivising investment in start-up and growing family businesses; and

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favourable tax treatment of technology-based businesses that have the potential to become companies of scale.

Corporative Policy Making A corporative approach to policy making means that government, business and other representatives of society work together collaboratively on the development of policies and integrated strategies designed to exploit Scotland’s competitive N-56 Objectives & Scotland Means Business Summary

advantages. This approach is consistent with both Christian Democrat and Social Democrat traditions in European politics. The new economic strategy for Scotland should be at the top of the hierarchy of policy, providing a framework for all other areas of policy and ensuring integration across all areas of policy. Ensuring that the economic performance of Scotland is central to policy will lead to a different approach to setting priorities and investing public funds. For example, transport infrastructure projects can be assessed and prioritised based on their contribution to strategic objectives, rather than discreet and competing cost benefits analyses. Integration of policy can also lead to better policy outcomes that take a more holistic and longer-term view of the costs and benefits of policy change. For example, an energy policy that was informed by economic development objectives as well as costs, security of supply and environmental impact may prioritise the commercialisation and growth of new sectors with export potential. A corporative approach to policy making is required, starting with the development of the new economic strategy for Scotland, involving government, businesses and others working on areas of common interest. This should apply to both the formation and implementation of policy. This corporative Business does already get involved in the policy making process; however, it tends to be in the form of responding to formal consultations or lobbying government on specific issues. A more strategic approach is required as is a change in culture of how we do business and politics to ensure that we increase expectations and focus policy on improving the performance of the economy rather than symptoms of under-performance. In addition to a more strategic decision making process and the integration of policy, a corporative approach also reduces the chances of policy shocks that businesses had not been expecting (such as the recent policy changes on pensions, which had not been foreseen by the many Scottish providers of annuities). A corporative approach requires leadership and co-ordination and it is important that senior Ministers, officials, and central agencies need to own and champion this process. Such strategy functions are commonly located in the centre of government, cutting across the full range of policy portfolios. The development of a new economic strategy for Scotland needs to be informed by a process to develop a clear, well-understood, and over-arching sense of Scotlandâ&#x20AC;&#x2122;s place in the world, the basis on which it will compete, and the strategic direction in which it will move. This process needs to be undertaken in an externally oriented way, looking at the international environment, and to be specific enough to guide a range of decisions and actions. This should be undertaken in collaboration with business and other stakeholder groups to ensure a broad range of perspectives are obtained. There needs to be clear connection and consistency between the diagnostic phase, the development of a medium-term strategic policy response, and the execution and delivery phase. A coherent strategy needs to integrate all three of these steps, and ensure consistency across a wide range of policy areas (rather

N-56 Objectives & Scotland Means Business Summary

than having specific policy areas guided by different goals). Institutions and capacity should be built to ensure that this can be delivered on an on-going basis.

Impacts and Benefits of the Strategy A new economic strategy for Scotland, based on the corporative approach recommended by N-56 should result in policies more suited to Scotland’s needs, opportunities and preferences. This should lead to a more competitive, better performing Scottish economy. Based on historic trends of productivity growth, but no change to population trends or the employment rate, Scottish GDP would increase by a third over the next 25 years to £192 billion. This would mean that Scotland was still behind faster growing competitors. By increasing productivity to match the top quarter of advanced economies, increasing the employment rate to the average of the top five and halving the gap between UK and Scottish population growth, would increase GDP from the baseline of £145 billion in 2012 to £269 billion by 2037, an 86% increase over 25 years. This can be delivered through increasing: •

productivity: increasing productivity by an additional 0.6% over historic trends, to match competitor economy, will increase output per person by £6,500 more than continuing with current trends;

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population: increasing to 6.11 million from 5.31 million in 2012, equivalent to 330,000 more people than current projections predict, mostly of working age people, retained in Scotland and attracted to move to Scotland by a growing economy;

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participation: increasing the employment rate from 71% to 80% to match the top five competitor economies would, when combined with population growth, would mean more than half a million additional jobs in the Scottish economy.

This would also increase GDP per capita by two-thirds, by more than £18,000, from around £27,000 to more than £45,000. This is an ambitious but realistic target. However, it will require transformational strategies and a new corporative approach to policy making and implementation. Projections for Scottish public finances, albeit based on pessimistic forecasts on oil revenues, forecast a bigger deficit than for the UK economy as a whole. Whatever, the outcome of the independence referendum it is difficult to see a political future where the rest of the UK would fund such a deficit. The only way to deal with the deficit is therefore to accelerate Scottish economic growth. Even using the Treasury’s projected Scottish deficit of £9.5 billion, the faster growth scenario associated with increased productivity, an increased employment rate and additional population could eliminate this deficit within seven years, and generate significant surpluses thereafter. If oil revenues are higher than forecast by the Treasury, as the industry currently expects, Scotland’s public finances would be stronger than the UK’s (as they have been over the last three decades), providing an opportunity to eliminate the deficit earlier.

N-56 Objectives & Scotland Means Business Summary

Implementation and Next Steps The need for a new economic strategy for Scotland is urgent and the benefits and impacts will be significant. Only a new, corporative approach can deliver the magnitude of change that is required. Whatever the outcome of the referendum in September 2014, there will be a need for further discussions and negotiations on constitutional issues. However, the collaborative development and implementation of a new economic strategy for Scotland should not wait for the outcome of these discussions and negotiations. Work should start immediately. This should include setting up an office in the heart of government, to take the lead to coordinate the contribution from government and the public sector. The role for business is to engage constructively on the development of a new economic strategy for Scotland, looking beyond the interests of individual businesses and sectors, to identify those measures that will increase competitiveness, boost productivity, create more high value jobs and accelerate economic growth. N-56 will seek further support in the business community for working more closely together with government, the third sector and communities in partnership towards the realisation of a single strategy, which will evolve over time.

N-56 Objectives & Scotland Means Business Summary

N-56 aims to provide a new focus for Scotlandâ&#x20AC;&#x2122;s business community to work with government and others throughout the country, to plan a more prosperous future for the whole of Scottish society. The ultimate aim is to ensure that Scotland attains a position among the top five advanced economies in the world. If you would like to learn more about N-56, its aims and activities, please visit our website www.N-56.org

112 George Street, Edinburgh, EH2 4LH

Scotland Means Business

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