Scotland's Future

Chapter 3 Finance and the Economy

• Independence will allow us to use our own resources and shape our own fiscal and economic policies for Scottish needs and circumstances. This will ensure greater economic security and opportunity in the future
• We plan to prioritise job creation through measures to encourage growth
• We will support manufacturing, innovation and the transition to a low carbon economy
• Scotland will continue to use the pound, providing continuity and certainty for individuals and businesses in Scotland and the rest of the UK
• We will support a labour market that helps people into work that is sustainable and fairly rewarded
• Our Fair Work Commission will guarantee that the minimum wage rises - at the very least - in line with inflation to ensure that work is a route out of poverty
• We will bring together employers and employees in a convention on employment and labour relations to build a collaborative approach to work and create a responsive labour market
• We have identified the following priorities to support the Scottish economy for the first session of an independent Scottish parliament
  • a commitment to increase the personal tax allowance, benefits and tax credits in line with inflation
  • a pre-announced reduction in corporation tax of up to three percentage points
  • a reduction of Air Passenger Duty by 50 per cent
  • the simplification of the tax system to reduce compliance costs, streamline reliefs and help to reduce tax avoidance, with a target revenue gain of £250 million a year by the end of the first term

 

Why we need a new approach

Scotland has strong economic foundations.

We have substantial natural resources, a highly-skilled workforce, a long-standing reputation for innovation, and an internationally-recognised brand, with products and companies competing at the highest level in international markets.

The First Report of the Fiscal Commission provided an overview of Scotland's economy and assessed performance relative to both the UK and other comparable nations. The Group concluded that:

By international standards Scotland is a wealthy and productive country. There is no doubt that Scotland has the potential to be a successful independent nation^[49].

Devolution has provided Scotland with some - albeit limited - ability to tailor policies to Scottish circumstances, and successive Scottish administrations have used these to help narrow a historic gap in economic performance with the UK.

 

Scotland's economic performance is now stronger than - or just as good as - the UK on key measures:

• even excluding the contribution of North Sea oil and gas, output per head in Scotland is 99 per cent of the UK average and the highest in the UK outside London and the South East^[50]
• adding in a geographical share of North Sea output gives Scotland an output per head almost 20 per cent higher than the UK
• in 2010 Gross National Income per head in Scotland - including the North Sea - was approximately £26,000, which compares with around £24,000 for the UK as a whole, according to experimental estimates^[51]
• productivity, measured as output per hour worked, is now identical in Scotland to that of the UK^[52]
• amongst OECD economies, it is estimated Scotland would be ranked eighth in terms of output per head^[53]
• in 2012, Scotland's share of all new UK Foreign Direct Investment projects was nearly 11 per cent^[54] - well above a population share
• Scotland's relative labour market performance has also strengthened. Scotland's employment rate has been higher, and our unemployment rate lower than in the UK as a whole for most of the recent period. Our rates of economic participation have also been better
• Scotland's public finances are estimated to have been in a relatively stronger position over the last five years, than the UK as a whole - to the tune of £12.6 billion^[55]

Scotland has a diverse economy with key strengths across a range of sectors such as food and drink, tourism, creative industries, life sciences, universities, financial services and manufacturing.

Scotland is rich in energy with around 25 per cent of Europe's offshore wind and tidal energy potential, and 10 per cent of Europe's wave potential^[56]. It is estimated that there could be up to 24 billion barrels of recoverable oil and gas remaining in the North Sea with the potential for production to continue for decades to come^[57].

As a regional economy within the UK, Scotland performs relatively well on aggregate measures of economic performance, but as an independent nation we could be doing significantly better. Many of our competitors are stronger, not just economically, but also in terms of equality and wellbeing^[58].

For example, Scotland's economy has grown more slowly than other comparable independent European countries in recent decades. Over time, such differences can have substantial implications for economic prosperity.

If Scotland moved from the rates of growth it has experienced in the past to instead match the levels of growth of small European countries, the benefits for people in Scotland in terms of prosperity and employment would be significant. As an illustration, had growth in Scotland matched these other independent nations between 1977 and 2007, GDP per head would now be 3.8 per cent higher, equivalent to an additional £900 per head^[59].

Growth and competitiveness are important, however there is a growing recognition that the characteristics of growth and the distribution of its benefits are just as important.

Under the Westminster system Scotland is locked in to one of the most unequal economic models in the OECD - with the UK ranked 28th out of 34 countries in terms of its Gini coefficient (a key measure of income inequality)^[60]. Such inequalities have in fact widened rather than narrowed in recent decades^[61]. Such patterns are not only damaging in their own right, but act to constrain growth over the long term^[62].

There is also clear evidence of increasing geographical imbalances which have concentrated jobs, population growth and investment in London and the South-East of England^[63]. At the same time, there has also been a gradual erosion of economic resilience with a declining manufacturing base, sustained current account deficits and higher levels of public and private sector debt.

The gap between rich and poor, the increasing concentration of economic activity in one small part of the UK, and growing imbalances in the structure of the UK economy all suggest that continuing as a regional economy will hamper job creation in Scotland and reduce economic security in the long term.

The economic choice in the independence referendum is about how we best equip ourselves to meet the challenges, seize the opportunities and secure the future for people living in Scotland now and in years to come.

The Scottish Government believes that the best option for Scotland is to become independent. It will create the opportunity to build an economy that takes advantage of Scotland's unique strengths and size, and which delivers a more outward focused, fairer and resilient economy.

The opportunities available to Scotland

Under the current constitutional arrangements, the Scottish Government has responsibility for devolved economic policy areas. However, responsibility for most important economic and social policies is reserved to Westminster. This includes welfare, employability, workplace relations, economic and financial regulation and consumer protection. The Scottish Parliament is responsible for just 7 per cent of taxes raised in Scotland. Even after the new tax powers of the Scotland Act 2012, this figure will only increase to around 15 per cent^[64].

Remaining under the Westminster system restricts Scotland's ability to meet future challenges and opportunities.

We are clear about the longstanding issues to be tackled in order to drive growth and address inequality in the Scottish economy. We will need to:

• create more and better employment opportunities across all parts of the country and tackle long-standing social and economic inequalities that constrain our economic potential
• boost and diversify our businesses
• rebalance the economy and strengthen the role of manufacturing and innovation
• grow our export base and provide the framework to help support Scottish companies to compete in global markets
• encourage a longer-term focus on investment and economic sustainability
• support the transition to a low carbon economy

Since devolution our performance within the UK has strengthened^[65]. This illustrates the advantages of Scotland making our own decisions to the benefit of our economy. But we can do much better.

Independence will provide the government of Scotland with access to economic and fiscal levers which the Westminster Government currently controls. Future Scottish governments will be able to set policy to Scotland's own circumstances, strengths and preferences.

Having responsibility for all economic levers in Scotland will allow us to transform our country. With independence we will be able to choose an economic approach that builds on our existing strengths and which helps deliver a more outward focused, dynamic and resilient economy. For example, independence will allow future Scottish governments to build on the progress already being made to tackle climate change and to capture Scotland's significant economic opportunities in the low carbon sector.

The performance of many small countries demonstrates the advantage of having a policy framework appropriate to local circumstances. Evidence shows that countries similar in size to Scotland have a strong track record^[66]:

• currently nine of the top fifteen OECD economies measured by output per head are of similar size to Scotland^[67]
• small countries make up a majority of the top 20 positions in the UN Human Development Index^[68]

An independent Scotland will not replicate the economic structure of the UK; instead independence will bring opportunities to operate more effectively and efficiently.

This Government's aim is that, within a decade, Scotland will achieve and maintain a place in the top 10 nations in the UN Human Development Index^[69]. Achieving this aim will show both an improved economic performance and that we have translated greater economic success into direct social and personal benefits for the people of Scotland.

The Scotland we can create

Since 2007, the Scottish Government has been pursuing an economic strategy with a clear purpose: increasing sustainable economic growth, with opportunities for all of Scotland to flourish.

Driving our ambition for a more successful economy are six key priorities:

• creating a supportive business environment
• delivering benefits from the transition to a low carbon economy
• improving opportunities for learning, skills development and wellbeing
• a focus on infrastructure
• ensuring effective government
• producing economic and social outcomes that are more equitable

These will remain at the centre of this government's approach in an independent Scotland.

An independent Scotland will be able to use our new powers to improve productivity, boost participation and build greater solidarity, cohesion and sustainability.

Productivity

More productive economies typically enjoy higher living standards. In 2011, Scotland's productivity was 100 per cent of the UK average measured by output per hour worked, and 99 per cent of the UK average in terms of output per filled job^[70].

However, in comparison with our international competitors, Scotland's (and the UK's) performance is less favourable. Countries, such as Norway, Ireland, Denmark and Austria do better. For example, productivity in Denmark is around 12 per cent higher than in Scotland^[71].

Independence will provide the opportunity to target policies to Scotland's unique circumstances and challenges, and to boost productivity. Our plans for re-industrialisation, innovation, taxation, investment and internationalisation will help to achieve this by delivering the necessary changes to our economy.

Participation and population

An engaged and productive workforce is central to long-term economic success. Greater participation increases the economy's growth potential. It is also key to addressing important social objectives, such as tackling poverty. A labour market which is resilient, adaptable to changes in economic conditions, and able to respond quickly to new opportunities and challenges is a major competitive advantage.

In recent years, Scotland has had a stronger employment record than the UK. However, consistent with the trend at the UK level, the characteristics and composition of our labour market has changed, adversely affecting job security, the rewards of work and equality of opportunity.

Many other independent countries perform more strongly both in terms of participation and job outcomes^[72]. Independence will give us control over labour market policies, including direct levers such as taxation, welfare and regulation, and indirect levers such as child care and employee and employer relations.

The most significant determinant of Scotland's long-term growth gap relative to the UK has been slower population growth. A country's population - in particular those of working age - is a key driver of long-term prosperity. Successive administrations have made boosting Scotland's population a top priority. The most recent Census showed that as at March 2011, Scotland's population stood at 5.295 million - the highest ever^[73]. However, the recent growth has only served to reverse the impact of decades of emigration and the latest population projections suggest that Scotland's working age population will not grow as rapidly as the UK as a whole^[74].

Independence will provide an opportunity to grow the economy more quickly, provide more opportunities for our young people to stay and build careers in Scotland and to attract skilled workers.

Solidarity, cohesion and sustainability

Scotland is currently a more equal country than the UK as a whole^[75]. However, in 2010, Scotland would still have been ranked 17th in the OECD in terms of income inequality, so clearly we need to do better^[76]. Too often the benefits of economic growth are not shared equally across the country. Independence will provide the levers to tackle inequalities in Scotland.

Aligning tax and welfare policies, helping people to move into sustained work and supporting people to develop the skills to progress will all help support better solidarity and cohesion in Scotland.

With independence, we will have the opportunity to:

• set out a vision for the type of economy and society that captures Scotland's distinct values and build distinct economic, industrial and social policies which reflect these aims
• use welfare and employment policies to tackle long-standing inequalities - both social and regional - that have persisted for decades
• prioritise tax powers, regulation and Scotland's new global status to develop growth sectors and growth companies, widen the export base, attract investment, and support local firms to move into new and emerging markets
• develop an industrial strategy that promotes manufacturing and its links to the local supply chain
• use the full array of business policies - affecting small and large businesses - alongside the resources of the public sector and Scotland's universities and colleges to support innovation and expand the business base
• target policy to barriers that hold Scotland back - for example, by reducing Air Passenger Duty to boost international connectivity
• build a more stable macroeconomic framework
• design a more efficient tax system
• implement an improved and streamlined consumer protection and regulatory regime which cuts back on waste and duplication
• coordinate devolved powers with new tax and expenditure responsibilities - for example, in skills and employability, childcare, tax and welfare - to deliver more coherent policies
• use full responsibility for Scotland's natural resources, such as control of the sea bed and oil and gas reserves, to maximise the growth prospects for the future and to enable communities to benefit from our assets
• align education and skills policy with employment and industrial policies to facilitate more high value job opportunities and achieve the objective of full employment
• recognise that our island communities have challenges and opportunities that differ from those in other parts of the country in areas like transport and energy

This is not a prescriptive menu of policies, but illustrates what choices could be made with independence. It will enable future Scottish governments - whatever their political colour - to look at how we can best grow our economy and create jobs, with a broader range of options and opportunities to do things differently.

A supportive, competitive and dynamic business environment

The choices open to us

An independent Scotland will have the opportunity to pursue policies designed to grow the economy and create jobs. With responsibility for the full range of policy levers, the government of an independent Scotland will be able to create a more supportive, competitive and dynamic business environment.

Within the devolved powers currently available, the Scottish Government is pursuing a range of actions to support sustainable economic growth and higher quality jobs, including the Small Business Bonus Scheme, attracting international investment, the Scottish Investment Bank and investment in infrastructure.

With independence, future Scottish governments can build on these policies to enable Scotland's businesses to reach their full potential. Future Scottish governments will be able to make choices over tax, measures to boost innovation and exports, promote good industrial relations and support small and medium sized enterprises.

Our priorities for action

Each of Scotland's political parties will bring forward policy proposals at the future elections to an independent Scottish parliament. If elected in 2016, the current Scottish Government's priorities for action will be as follows.

A competitive and efficient tax environment

Being close to a global economic hub such as London can be an advantage for Scotland. However, London inevitably acts as an economic magnet, attracting jobs and investment (particularly headquarter operations) away from other parts of the UK. The ability to vary tax is essential to redress the unbalanced nature of the UK economy.

We plan to set out a timescale for reducing corporation tax by up to three percentage points below the prevailing UK rate. The intention of pre-announcing the cut is to stimulate economic activity in advance of it taking place and to retain and attract new investment. This will be one way to secure a competitive advantage and help to reverse the loss of corporate headquarters which has been a feature of the Scottish economy over the last 30 years.

Support for the reindustrialisation of Scotland

A key priority will be to re-balance and re-industrialise Scotland's economy, to secure a number of benefits including:

• boosting high-value jobs - through increased manufacturing activity^[77]
• promoting innovation - although manufacturing firms account for only 12 per cent of Scottish (onshore) output^[78], they account for 66 per cent of business R&D spending^[79]
• addressing geographical disparities - the decline in manufacturing has contributed to geographical imbalances across Scotland. Increasing manufacturing activity in a local area will help develop clusters of economic activity and support local supply chains^[80]
• boosting exports - around 62 per cent of Scottish international exports are manufactured and a greater focus on internationalisation across the economy will help boost competitiveness and support jobs^[81]

One option for future governments to support manufacturing and boost innovation will be to use the tax system to improve incentives for investment, for example through more generous depreciation allowances for key growth sectors in Scotland.

The current Scottish Government will also develop a new industrial strategy for Scotland. Key elements of the industrial strategy will include:

• support for investment, including research and development
• support for indigenous companies and ownership by strengthening the role of the Scottish Investment Bank
• expanding skills development by bringing together employment and skills policies and putting modern apprenticeships at the heart of our approach
• expanding our manufacturing base, with a particular focus on maximising the manufacturing opportunities of our offshore energy potential
• targeted use of loan guarantees

Boosting connectivity

In the modern global economy, air connections are vital to international connectivity. Benchmarking analysis, based on 2011 data, indicated that Scotland's short haul network had almost reached the level of connectivity that would be expected when compared to peer regional networks^[82]. However, Scotland's long-haul network performance is not as strong and there are clear areas for improvement to destinations such as the Asia Pacific region and North America.

With independence, government policies - for example, careful design of Air Passenger Duty (APD) - can be used to encourage the types of flights that benefit Scotland. Analysis suggests that the current APD impacts negatively on the Scottish economy, with APD in the UK now the highest tax of its type anywhere in the world.

A recent study estimated that APD will cost Scotland more than £200 million a year in lost tourism spend alone by 2016^[83]. We plan to reduce APD by 50 per cent in the first term of the independent parliament, with a view to abolishing it when public finances allow.

As an independent nation, Scotland will be better placed to work with airport, airline, tourism and other partners to sustain network development activity in long-haul markets, as part of a Team Scotland approach. The Irish Government has for example struck a deal with Customs Authorities in the US to allow passengers travelling through airports in Ireland to clear passport control before boarding the plane^[84].

Maximising the opportunities of our overseas representation

At present Scottish Development International has offices across Asia, the Pacific, Europe, the Middle East and the Americas^[85]. An independent Scotland will prioritise our effort and resources to strengthen our international presence in the nations and markets that are of greatest economic importance to us. It is worth noting that 91 per cent of total Scottish exports currently go to 21 countries^[86].

A crucial part of the role of Scotland's proposed overseas representation (see Chapter 5) will be to identify opportunities to directly promote Scottish goods and services. The Team Scotland approach will be built on and with independence our government departments, the private sector and our diplomatic missions will work together to promote Scotland.

Other actions

In addition to the priorities outlined above - all of which are designed to improve productivity, participation and cohesion - we will also take the following actions:

Support small and medium-sized enterprises

This government will continue our commitment to the Small Business Bonus which has reduced, or eliminated entirely, business rates for tens of thousands of properties across Scotland and to maintaining Scottish business rates parity with the rest of the UK^[87]. The tax system in Scotland will be designed to reduce compliance burdens facing small and medium-sized enterprises in particular.

The Government will also examine the case for an increase in the National Insurance employment allowance for small business.

Streamline competition and regulation policy

Competition is a key driver of productivity, exports and consumer value and choice. An independent Scotland, as part of the EU, will continue to meet the regulatory requirements associated with membership - many of which relate to the operation of the Single Market. We will also develop and deliver a streamlined and efficient regulatory model with a combined regulatory body with a single, strong voice, both in Scotland and internationally, on competition and consumer issues^[88].

Strengthen consumer protection

Scottish consumers are an important part of the economy^[89]. In order for economic activity to flourish it is important that consumers are able to trust businesses. We will establish a more integrated, simplified consumer landscape with a single consumer body to take into account Scottish specific issues, such as unfair parcel delivery charges in rural areas, building on the Scottish Government's proposal for a combined economic regulator.

Directly influence EU legislation

With independence Scotland's government will be able to represent Scotland's interests as a full and active participant in the EU.

Maximise investment

Investment in infrastructure will remain a central part of the Scottish Government's approach to supporting long-term sustainable economic growth. On independence the Scottish Government will make our own decisions about resources for capital investment. We will have full access to capital borrowing and will take forward infrastructure priorities as set out in our Infrastructure Investment Plan.

Increasing innovation throughout Scotland's economy

Innovation is a key driver of productivity and growth^[90]. Firms innovate in order to stay ahead of their rivals, through the production of new knowledge or the application of existing knowledge.

The top-performing small independent countries emphasise science and innovation in their economic strategies. Many small countries have been increasing their research and development (R&D) spending, as a percentage of GDP, more quickly than larger economies^[91]. From 2001 to 2011 total R&D spend rose as a percentage of GDP in Finland, Denmark and Ireland. In contrast, R&D spend as a percentage of GDP in the UK and Scotland remained broadly unchanged over this period^[92].

This investment in science and technology, and in education and training more generally, has allowed many of our competitors to strengthen their performance in export markets - in particular high technology export markets - and support economic growth.

The largest proportion of R&D spend comes from the private sector - on average around two thirds of total R&D expenditure across OECD countries^[93]. However, in Scotland this proportion is considerably lower, with the largest contribution to total R&D spend coming from investment by the Higher Education sector^[94].

Scotland's investment in Higher Education R&D is world class - the latest official statistics show that, in 2011, Scotland's Higher Education R&D expenditure as a percentage of GDP ranked top of the 12 countries/regions of the UK, and fourth highest among the OECD countries^[95].

Key priorities for Scotland will be to find ways of boosting business spending on research and development, whilst enabling higher levels of commercialisation of the world-class research produced at Scottish universities.

With independence Scotland will further strengthen the relationships and linkages between key partners in innovation - including businesses, universities, funding providers, companies, and public sector agencies - in a coherent strategy with shared priorities.

Direct financing levers

With independence we will develop and expand direct financing instruments, including the provision of credit loans and guarantees and encouraging higher levels of equity financing and venture capital.

Indirect financing levers

Tax based incentives that are aimed at encouraging investment in innovation activities can be applied to either expenditure (related to R&D) or income that results from investment in R&D. Following independence this Government will examine how best to develop and target such tax relief to encourage Scotland's innovative industries.

Intellectual property

We will ensure continuity of the legal framework for protecting intellectual property rights. Independence will also allow Scotland to offer a simpler and cheaper, more business-friendly model than the current UK system, which is bureaucratic and expensive, especially for small firms. The UK is one of the few EU countries which does not offer a scheme which covers the basics of protection. Scotland could follow, for example, the German model which protects technical innovations.

Scotland also has a distinctive body of expertise in dispute resolution through the Scottish Arbitration Centre which could be developed as an international centre of excellence in arbitration.

We recognise that researchers are highly skilled, and globally mobile. Scottish universities recruit researchers from across the world, whilst many Scottish researchers work in institutions in other countries. With responsibility for immigration policy this Scottish Government will amend recent Westminster Government restrictions which impact in particular on the ability of our universities and colleges to attract international students. We will develop an approach to immigration to attract international talent at a level that would support high growth companies to develop and grow (see Chapter 7).

Innovation is not limited to high tech sectors. It can also drive growth across the economy by investing in new approaches to meeting customer needs and attracting attention to Scottish products. For example, VisitScotland developed a unique partnership with The Walt Disney Company to make the most of the opportunity of the animated feature Brave to boost tourism in Scotland. The Scottish Government and VisitScotland have continued to build on this innovative relationship with the world's largest entertainment organisation, showing Scottish food, drink and culture and promoting our assets as a tourism destination at the recent eighth Epcot International Food & Wine Festival at Walt Disney World in Orlando, Florida.

A valued and well-rewarded workforce

The choices open to us

A country's people are its greatest asset and it is vital that everyone in Scotland has the opportunity to fulfil their potential. Well rewarded and sustained employment is the best route out of poverty and the best way to tackle inequality.

All the actions described in this chapter are designed to improve job opportunities and long-term economic resilience. With independence, we will focus on creating better work opportunities, with the aim of creating maximum employment for the entire workforce and the long-term success of Scotland's economy.

Under devolution the Scottish Government has responsibilities for education and skills, but not for employment regulation, tax or welfare policies, all of which are crucial to support people entering and remaining in employment. The Scottish Government is responsible for training the present and future workforce, equipping them with the skills and knowledge they need, but has no say in how they are treated once they are in a job.

The Scottish Government has used our responsibilities to support employment, in particular to address the challenge of youth unemployment. The action we have taken includes a commitment to 25,000 new apprenticeship opportunities in each year of the current Parliament, the majority of which are targeted at young people; and Opportunities for All, which is a guaranteed place in education or training for all 16-19 year olds not already in learning, training or employment.

Independence will enable future Scottish governments to create a more coherent framework for employment and the labour market - one that links education, employability training, welfare, taxation and health with action aimed at creating a supportive business environment to foster job creation. It will also allow us to create joined up services which match job seekers and opportunities, within a supportive culture, offering help and assistance to those furthest from the labour market.

The success of Scotland in creating job opportunities and greater economic security than at present will also depend crucially on a sense of cohesion. There is good evidence that countries of Scotland's size that perform well have a sense of shared national purpose^[96]. With independence steps can be taken to improve cohesion, and partnership within the economy.

Our priorities for action

The priorities for action for this Scottish Government in the first term of an independent Scottish parliament will be to:

• work directly with the trade unions, employer associations, employers and the voluntary sector to build a partnership approach to addressing labour market challenges
• create sustainable employment that pays fairly through changes to the minimum wage and a commitment to the living wage
• encourage people into work through a focus on early intervention and policies that support skills, training and opportunity

We will work with the STUC and the business community on mechanisms to formalise the relationship between government, employer associations and employee associations with a particular focus on encouraging wider trade union participation and in recognition of the positive role that can be played by collective bargaining in improving labour market conditions. For example, evidence from the OECD shows that stronger trade unions tend to reduce inequality in labour income and ensure a more equal distribution of earnings^[97].

With independence powers over employment legislation will transfer from Westminster to Scotland. Employment law and regulations cover minimum terms and conditions, maternity and paternity rights, worker representation, the rules around unions and collective bargaining and the minimum wage.

The Scottish Government has adopted a strong social partnership approach, working with the voluntary sector, unions, employer associations and employers directly. With independence we will build on this approach.

We have proposed a Fair Work Commission which, as part of a remit, will deliver the mechanism for uprating the National Minimum Wage.

We will also establish a National Convention on Employment and Labour relations. Bringing together labour market regulation and other employment-related policies in a forum which encourages direct and constructive dialogue across all key stakeholders will be a major advantage. This could, in principle, range from a focus on high-level issues such as labour market reform, to sectoral issues such as addressing skills-shortages in key sectors and particular policy initiatives such as the Living Wage.

Employee representation

Analysis by the TUC shows that in 14 of the 28 EU member states workers have the right to be represented on company boards^[98]. These countries have adopted different models in line with their own circumstances and cultures. There are differences for example in how worker representatives are nominated and elected and which companies are covered by the requirement.

Employee representation can help to bolster long-term decision-making and improve industrial relations. There are already examples of good practice here too - First Group has had an employee director since the company was created in 1989.

In an independent Scotland we will consult on the best form of employee representation on company boards.

We will also take steps to ensure that women have equal opportunities in terms of the quality as well as the number of jobs. Greater action needs to be taken to improve female representation and diversity on company boards.

Whilst the Westminster Government requires firms to report the number of men and women on their boards^[99], and has a target to increase the number of women on FTSE 100 boards to 25 per cent by 2015^[100], a number of European countries have adopted a more progressive attitude to gender balance on company boards. Belgium, Italy, France, Iceland and Norway have already introduced legislation requiring a gender quota on boards^[101].

The Scottish Government will consult on a target for female representation on company - and public boards - and, if necessary, we will legislate as appropriate.

Independence will allow Scotland to bring together all of our resources and expertise, including academic and industry expertise, employee and employer organisations, in direct and constructive dialogue across Scotland's economic sectors - including new and emerging sectors, such as renewables - and on key issues, such as the Living Wage, zero-hours contracts and access to Employment Tribunals. An independent Scotland can examine innovative ways to support improvements in the productivity and well-being of the workforce.

Sustainable and fairly rewarded employment

The Scottish Government believes that it is absolutely vital for our economy and for our society that work pays, and that work pays fairly. The living wage and minimum wage will be central elements of our employment policy.

Living Wage

Achieving fair levels of pay is a fundamental aspect of building a more equal, socially just society. More of the people living in poverty today are in work than out of it and this trend has increased since the mid-1990s^[102]. The Scottish Government fully supports the Living Wage campaign and its principle of encouraging employers to reward their staff fairly. We have led by example by ensuring all staff covered by the public sector pay policy are paid at least the Scottish Living Wage. This covers the 180,000 people in Scotland working for central government, our agencies and the NHS^[103] benefiting directly up to 3,300 workers^[104]. This is part of the Government's "social wage" - the contract between the people of Scotland and their government.

Our commitment to support the Scottish Living Wage for the duration of this Parliament is a commitment to those on the lowest incomes. However, over 400,000 people in Scotland are working for less than the living wage, which is nearly a fifth of the Scottish workforce and the majority of these low paid workers are women^[105]. The Scottish Government is funding the Poverty Alliance to deliver a Living Wage Accreditation Scheme to promote the living wage and increase the number of private companies that pay it to make decent pay the norm in our country. We will continue to support and promote the living wage in an independent Scotland.

Minimum Wage

Around 70,000 people currently receive the minimum wage in Scotland^[106]. In real terms the minimum wage has failed to increase in almost a decade and in every single year since the recession of 2008 it has failed to keep up with the cost of living - if the minimum wage had increased in line with the cost of living over the past five years some of the lowest paid Scots would now earn almost £675 a year more than they do today^[107].

This Scottish Government is therefore giving a firm commitment that if we are the government in an independent Scotland, the minimum wage will in future rise at least in line with inflation.

This Scottish Government's Fair Work Commission, with members drawn from business, trade unions and wider society, will advise the government on the minimum wage. The Commission will also provide advice on other factors relating to individual and collective rights which contribute to fairness at work and business competitiveness, recognising that both are integral elements of sustainable economic growth in Scotland. The Commission will work with the larger Convention on Employment and Labour Relations. Together they will help the Scottish Government foster a constructive and collaborative approach to industrial relations policy and formalise the relationship between government, employers, trade unions and employee associations.

Other actions

Other specific policies that the current Scottish Government will pursue to improve the labour market will include:

A Youth Guarantee

The Youth Guarantee will establish the opportunity of education, training or employment as constitutional rights. In an independent Scotland this right could be extended to those aged up to 24 years old, building on the success of the current Opportunities for All guarantee of employment, apprenticeship or training for all young people age 16 to 19. This approach will put us in line with the rest of Europe where the EU Youth Guarantee aims to offer young people across Europe a job, apprenticeship, traineeship or education place within four months of becoming unemployed or leaving education. A new programme of EU funds will become available from 2014 to allow member states to make significant progress on this commitment.

A focus on early intervention

Employment services in an independent Scotland will be built on the principle of "early intervention", and seek to prevent individuals from becoming long-term unemployed with all of the associated problems for individuals and for society. An early assessment of needs can provide support when required rather than after nine or 12 months as happens under the current system.

Integration of skills and employability

Following independence, we will bring together job matching, employability training and career guidance, currently being delivered separately in Scotland by the Department for Work and Pensions and Skills Development Scotland. This will allow local service delivery to be customised more closely to the needs of individuals. We will also aim to provide more tailored and coherent provision and increase the involvement of the Third Sector.

Strengthening employment protection

While each element of employment regulation has individual impacts, taken together as a system, they need to balance the twin objectives of protecting the rights of employees and encouraging companies to grow and create good quality jobs. The current Scottish Government plans to reverse recent changes introduced at Westminster which reduce key aspects of workers' rights. For example on independence we will restore a 90 days consultation period for redundancies affecting 100 or more employees.

Abolish the Westminster Governmentʼs Shares for Rights scheme

This scheme encourages workers to give up employment rights in areas such as unfair dismissal and redundancy pay in return for tax incentives on shares in their employers. The TUC has criticised the scheme and notes that there was overwhelming opposition to the proposals during the consultation process^[108]. The Institute for Fiscal Studies has described the policy as having all the hallmarks of another tax avoidance scheme^[109].

An effective immigration policy

We plan to develop and operate a controlled, transparent and efficient immigration system that best meets Scotland's needs. This will include a points based approach targeted at particular Scottish circumstances. We will also reintroduce the post-study work visa, which was abolished by the Westminster Government in April 2012 (see Chapter 7). This visa will encourage more talented people from around the world to further their education in Scotland, providing income for Scotland's institutions and contributing to a growing economy.

Our currency, fiscal rules and financial regulation

The choices open to us

A robust macroeconomic framework is essential to deliver robust economic growth and to create jobs. The Fiscal Commission, comprising eminent economists including two Nobel laureates, has explored the full range of options available to Scotland.

Their first report analysed an independent Scotland's currency choices, and the inter-linkages between a framework for monetary policy, financial stability and fiscal sustainability^[110]. Having considered in detail all the options, they put forward a robust framework - including retention of the pound - which will be workable from day one of independence.

Currency and monetary policy

An independent Scotland will be able to decide our currency and the arrangements for monetary policy.

Four currency options were examined by the Fiscal Commission - the continued use of Sterling (pegged and flexible), the creation of a Scottish currency and membership of the Euro.

They concluded that retaining Sterling as part of a formal monetary union with rest of the UK will be the best option. The Fiscal Commission proposed a practical and workable model, including governance and institutional arrangements that would create a successful and robust framework.

The Commission's analysis shows that it will not only be in Scotland's interests to retain Sterling but that - post independence - this will also benefit the rest of the UK.

Under such an arrangement, monetary policy will be set according to economic conditions across the Sterling Area with ownership and governance of the Bank of England undertaken on a shareholder basis.

Choice of currency arrangements
The Fiscal Commission considered the currency options for an independent Scotland. Following a detailed analysis of the various options, the Commission^[111]:

"commends to the Scottish Government retaining Sterling as part of a formal monetary union, and believes that this provides a strong overarching framework for Scotland post-independence."

Analysis highlights a number of key reasons why this would be in both Scotland and the UK's interests immediately post-independence^[112]:

1. the UK is Scotland's principal trading partner accounting for 2/3 of exports in 2011, whilst figures cited by HM Treasury suggest that Scotland is the UK's second largest trading partner with exports to Scotland greater than to Brazil, South Africa, Russia, India, China and Japan put together

2. there is clear evidence of companies operating in Scotland and the UK with complex cross-border supply chains

3. a high degree of labour mobility - helped by transport links, culture and language

4. on key measurements of an optimal currency area, the Scottish and UK economies score well - for example, similar levels of productivity

5. evidence of economic cycles shows that while there have been periods of temporary divergence, there is a relatively high degree of synchronicity in short-term economic trends

It would, of course, be open to people in Scotland to choose a different arrangement in the future. However, we believe that this proposal is the right one for Scotland and that it reflects the modern partnership that we seek between the nations of these isles following independence.

A shared successful monetary union needs to have an adequately designed framework for financial stability and fiscal sustainability. These are areas which have also been examined in detail and reflected in the recommendations and advice of the Fiscal Commission.

Financial stability and financial regulation

The financial crisis showed that many countries, including the UK, had allowed flawed models of regulation to develop. It also demonstrated that regulation can only be effective if it takes account of the global nature of financial institutions. That's why we have seen an increasing emphasis on international collaboration in recent years.

With independence, Scotland will become a full member of the EU and, as highlighted above, will retain Sterling.

Membership of the EU and the increasingly integrated single market for financial services will be central to Scotland's continuing success as a leading financial centre. We will adopt EU initiatives, just as the UK does at present. The only implication for the rest of Europe, or for multinational companies, is that such rules, regulations and directives will be implemented in 29 countries instead of 28.

Financial products and services (including deposits, mortgages, and pensions) will remain denominated in the same currency. Moreover, as part of the same single market, firms will, in the main, continue to provide products and services to consumers across Scotland and the UK no matter where they are based.

There are two main areas of financial regulation.

Firstly, there are regulations that relate to the safety and soundness of financial institutions and the overall financial system as a whole.

Secondly, there are regulations relating to the conduct and behaviour of financial institutions and how they interact with their customers.

An independent Scotland will establish our own regulator, as is the case in all other EU countries.

For the first aspect of financial regulation - financial stability - in light of reforms to improve the resilience of the global financial sector, the clear trend toward cross-border co‑ordination and with significant financial firms operating across Scotland and the UK, financial stability policy will be conducted on a consistent basis across the Sterling Area. This is in line with the proposal of the Fiscal Commission^[113]. It is also consistent with international trends, which includes the creation of a European Banking Union with the European Central Bank taking responsibility for regulating the largest Euro Area banks.

There are a number of practical arrangements for how this could be achieved.

The Fiscal Commission set out that the Bank of England Financial Policy Committee will continue to set macroprudential policy and identify systemic risks across the whole of the Sterling Area. There could be a shared Sterling Area prudential regulatory authority for deposit takers, insurance companies and investment firms. Alternatively this could be undertaken by the regulatory arm of a Scottish Monetary Institute working alongside the equivalent UK authority on a consistent and harmonised basis.

The Bank of England, accountable to both countries, will continue to provide lender of last resort facilities and retain its role in dealing with financial institutions which posed a systemic risk.

Where financial resource was required to secure financial stability, there will be shared contributions from both the Scottish and Westminster Governments based on the principle that financial stability is of mutual benefit to consumers in both countries.

This will reflect the fact that financial institutions both in Scotland and the UK operate - and will continue to operate - with customers in Scotland, England, Wales and Northern Ireland and their stability will benefit all concerned.

Scotland will play our full part in protecting the financial system on these isles, taking responsibility for activity within Scotland as part of joint action across the Sterling Area.

Such a framework is consistent with the clear trend toward greater international co‑operation on financial stability. An additional key lesson from the recent financial crisis was the need for more robust frameworks to monitor financial risks across borders and to establish frameworks so that financial institutions cannot be 'too big to fail'. Our approach is consistent with this.

Financial products, financial regulation and protecting consumers

The second aspect of financial regulation covers the monitoring of the conduct and behaviour of firms in local markets, to ensure that financial markets function well, with choice and competition, whilst protecting consumers. It is proposed that this aspect of financial regulation will be discharged by a Scottish regulator which will assume the key responsibilities of the UK Financial Conduct Authority in Scotland.

It will work on a closely harmonised basis with the UK regulators, delivering an aligned conduct regulatory framework, to retain a broadly integrated market across the Sterling Area. The regulatory approach will include the application of single rulebooks and supervisory handbooks.

This framework will mean that firms will be able to continue to provide financial products and services no matter where they are based (for example, banks based in the UK will continue to provide services to customers in Scotland and vice versa).

An independent Scotland will work with the UK and EU to continue to realise the joint benefits of an integrated market.

The market for financial products between Scotland and the UK - including bank accounts, pensions, loans and insurance - is highly integrated. Under the framework set out above, this will largely continue after independence and will be consistent with the development of the European Single Market on financial services. This ensures that consumers can choose not only from providers of financial products and services in their home market, but also providers based elsewhere in Europe.

Where there is a fully integrated market with products able to be bought across Scotland and the rest of the UK, one common Bank of England interest rate for the Sterling Area and close alignment between the two economies and regulatory structures, there is no reason for borrowing rates for consumers to be affected.

Private pension provision will also be unaffected. Existing arrangements that individuals have with private pension providers will continue and pension payments will continue to be paid in Sterling. See Chapter 4 for more information on pensions.

In an independent Scotland, this Government will continue to support existing tax-free savings products, like savings and investment ISAs. Existing schemes will be honoured in full following independence.

We will also continue to have compensation schemes in place, providing protection equivalent to that which is available in the UK, and in line with European harmonised levels of consumer protection. This includes bank deposits, which under EU harmonised rules, are protected at the equivalent of €100,000 (£85,000). Consumers in both Scotland and the rest of the UK will remain protected on a consistent basis.

Compensation schemes will be funded by a proportionate industry levy, as is currently the case. As part of the framework for financial stability proposed above, the Scottish Government sees merit in a jointly-operated or co-ordinated scheme across the Sterling Area for key aspects of compensation.

Scotland will also be responsible for our own competition and consumer protection landscape, including money advice and financial ombudsman services. Much of this landscape is fragmented at the moment, and there is significant scope to deliver this more efficiently in an independent Scotland offering a real opportunity to deliver better outcomes for consumers.

For example, many people in Scotland, including some of the most vulnerable are getting into severe financial trouble using short-term credit, such as pay day loans, which have extremely high interest rates and default charges. Payday lenders will be subject to tougher regulation in an independent Scotland. This Government plans to introduce a cap on short-term interest rates - as there is in many countries in Europe, Japan, Canada and some US states - and to regulate advertising and place restrictions on the 'rolling over' of loans, which sees those unable to pay off the initial debt saddled with a bigger loan that is more difficult to clear.

Fiscal framework

The third aspect of a robust macroeconomic framework is a sustainable fiscal framework. Scotland has sound public finances, and a relatively strong position compared to the UK as a whole.

We will introduce a robust fiscal framework, which will promote stability and provide flexibility to respond to economic shocks. This will be a key foundation of sustainable economic growth in Scotland and will be based on a system which ensures that public sector debt and borrowing are managed effectively and responsibly.

We will follow the advice of the Fiscal Commission, which has highlighted a number of features that are desirable for the fiscal framework of an independent Scotland^[114]. These include:

• fiscal rules to promote fiscal discipline and help ensure that the public finances remain on a transparent and sustainable path
• the establishment of an independent Scottish Fiscal Commission to provide advice on and scrutiny of Scotland's public finances
• the creation of a sovereign wealth fund - a Scottish Energy Fund - to enhance both the Scottish Government's ability to manage short-term fluctuations in oil revenues and to promote long-term fiscal sustainability^[115]

The Scottish Government recognises that a sustainable fiscal framework is important no matter the currency arrangement. However, it is particularly important in a well-functioning monetary union to avoid significant divergences in fiscal balances.

That is why such a monetary framework will require a fiscal sustainability agreement between Scotland and the rest of the UK, which will apply to both governments and cover overall net borrowing and debt. Given Scotland's healthier financial position we anticipate that Scotland will be in a strong position to deliver this.

Within this overarching framework the Scottish Government will have full autonomy to use our fiscal and wider economic independence to boost growth, address any weaknesses in the Scottish economy and take advantage of opportunities for growth. This will need to be managed responsibly.

Monetary unions allow for significant differences in fiscal and economic policies. For example, Luxembourg and Belgium have been in currency union for decades but have substantial variations in tax policies, VAT is 15 per cent in Luxembourg and 21 per cent in Belgium^[116]. Corporation tax in Ireland remains at 12.5 per cent but is higher elsewhere in the Eurozone^[117].

Our tax system

The choices open to us

Within the current constitutional arrangements the Scottish Parliament, even after the implementation of the Scotland Act 2012, will be responsible for only 15 per cent of Scotland's tax revenues^[118]. The Scottish Parliament will have a limited ability to vary income tax rates, be responsible for Land and Buildings Transaction Tax (a new, more progressive tax replacing Stamp Duty Land Tax), and the Scottish Landfill Tax, and retain continuing responsibility for Council Tax and Business Rates.

In contrast, with independence the Scottish Parliament will have full control over taxation. It will be for the elected government and parliament of the day to decide on individual taxes in an independent Scotland.

Until such times as tax rates are changed by a future Scottish government, they will remain the same as the prevailing rate in the UK. Future Scottish governments may wish to vary tax rates and/or thresholds for a variety of reasons. However, there will be no necessity to do so to pay for current spending.

In addition to increased flexibility in relation to tax policy, independence will allow the tax system as a whole to be re-designed based on a clear set of principles and to better link to complementary areas of policy such as welfare. Independence will provide an opportunity to design a Scottish tax system based on specific Scottish circumstances and preferences^[119].

The UK tax system is complex and inefficient. It is estimated that there are over 10,000 pages of tax legislation making it one of the longest tax codes in the world, and the Office of Tax Simplification (OTS) found in 2010 that there were 1,042 separate exemptions in the UK tax system. The Fiscal Commission and other commentators, such as the Institute for Fiscal Studies, has recognised the potential for Scotland to design a simpler and more efficient tax system following independence.

Unnecessary complexity in the tax system, through multiple exemptions, deductions and allowances, creates opportunities for tax avoidance. By designing a simpler tax system based on a clear set of principles with fewer reliefs and exemptions, Scotland could reduce the scope for individuals and corporations to exploit opportunities to avoid paying their fair share of taxes and so generate additional public revenues without increasing tax rates.

A more complex tax system is also costly to administer, as well as placing extra compliance costs on taxpayers. The most recent data shows that administration costs, measured as a proportion of net revenues collected, are higher in the UK than many countries. Over the last three years of data, UK administration costs were higher on average than many countries of a comparable scale to Scotland, including Denmark, Sweden and Finland^[120].

Our priorities for action

Detailed policies on tax and spending will be set out in party manifestos for the 2016 election and thereafter in the first budget in an independent Scotland. There is no requirement to increase taxes to pay for the services we currently enjoy in Scotland. The approach to tax of the current Government will focus on fairness and economic growth. To reflect this, if we are elected to be the first government of an independent Scotland, our early priorities will be those set out below.

We plan to build a taxation system which stimulates the economy, builds social cohesion and sustains Scotland's public services. These priorities will mark the first steps in reforming the tax system that we will inherit upon independence. They will also pave the way for a more significant review of the tax system in the early years of independence - in order that we can realise the full benefits of a modern and efficient tax system.

This Scottish Government's priorities will be to:

Increase personal allowance and tax credits by inflation. Personal allowances, the thresholds between income tax bands and caps on National Insurance Contributions, as well as tax credits, have all been used by successive Westminster governments to adjust the burden of taxation and the tax-take. However, these approaches to taxation can be complex and not transparent to the individual taxpayers. This Government intends following independence to introduce a clear and simple tax system in an independent Scotland. We plan in the short-term to increase transparency and certainty in the current system by uprating the basic rate allowances and tax credits by inflation each year, preserving their value in real terms. Our progressive policy will help the lowest paid workers in our economy.

Reduce Air Passenger Duty (APD) by 50 per cent. A recent study by York Aviation estimated that APD will cost Scotland more than £200 million a year in lost tourism spend alone by 2016. In addition to the direct losses to the Scottish economy, a report earlier this year by PWC showed that reducing APD would increase other tax receipts, such as VAT^[121]. A reduction in APD will allow Scotland's airports to be more competitive in attracting new direct air routes and will improve our international connectivity. More direct routes will also enable Scottish travellers to avoid connections via airports such as Heathrow. As an early priority for action the Government plans to reduce APD by 50 per cent, with a view to eventual abolition of the tax when public finances allow. This tax cut will encourage business travel and reduce costs for families of holiday flights from a Scottish airport.

Set a competitive corporation tax. We can send a clear signal that Scotland is one of the most competitive and attractive economies in Europe, with tax rates designed to boost economic activity and support the fast-growing industries that already have a comparative advantage here in Scotland. Corporation tax rates remain an important tool for securing competitive advantage and for offsetting competitive advantages enjoyed by other parts of the UK, notably London.

This Government plans to set out a timescale for reducing corporation tax by up to three percentage points below the prevailing UK rate. Modelling suggests that such a cut could increase the level of output by 1.4 per cent, boost overall employment in Scotland by 1.1 per cent (equivalent to 27,000 jobs) and raise overall investment in the Scottish economy by 1.9 per cent after 20 years^[122].

Ending the Westminster Governmentʼs proposals for tax allowances for some married couples. This scheme will effectively discriminate against many families where both partners work, unmarried couples, widows, widowers, single parents and women who have left abusive relationships. Under the proposed system, around two-thirds of all married couples will not benefit and analysis of the proposals suggest that couples with children are much less likely to receive the full allowance and that many low and middle income married couples are likely to have much of the tax break clawed back through the benefits system^[123]. The Institute for Fiscal Studies has noted that because of the way the scheme will operate some people will be worse off after a pay rise and that even if a government wanted to reward marriage through the tax system ther are simpler ways of doing so^[124]. With access to tax and benefit powers the Scottish Government will make a different choice from that made by the current Westminster Government. Our priority is to help families with children by expanding childcare provision.

Examine the case for increase in National Insurance employment allowance for small business. Across most OECD countries both employees and employers make social security contributions. This Government plans to examine the potential to increase the employment allowance for small businesses to encourage employment.

Design a more efficient tax system. The Government plans a simple and transparent tax system after independence designed to minimise the opportunities for tax avoidance - such as the Shares for Rights Scheme - that have been exposed in the UK system^[125], which mean too many individual and corporate taxpayers do not pay their fair share. Over the course of the first independent parliament, the Scottish Government and Revenue Scotland will work together to simplify the tax system to reduce compliance costs, streamline reliefs and help to reduce tax avoidance, with a target revenue gain of £250 million a year by the end of the first term.

In addition, we intend the administration of the tax system in Scotland to be simpler and lower cost. In particular, this Government will task Revenue Scotland to reduce compliance costs for small and medium sized businesses in Scotland to counter what can often be the regressive impact of such costs on small business that generate valuable employment.

As recommended by the Fiscal Commission, the Scottish Government proposes a transitional period during which the current functions of HMRC are continued in Scotland and the rest of the UK on a shared services basis^[126]. Taxpayers will therefore see no immediate change to their current arrangements for paying tax on independence. However, the initial improvements to the system will be in place within the period of the first independent parliament.

We plan to develop a new tax system for Scotland to better meet key policy objectives, based on the design principles of a modern and efficient system set out by the Fiscal Commission:

• simplicity - tax rules and obligations are well known, easily understood and liability is clear
• neutrality - the negative or unintended effects of taxation should be minimised and decisions on taxes should be made on merit
• stability - of both tax revenue stream and tax rules and procedures, allowing predictability and certainty in the decision making and planning of individuals, businesses and government
• flexibility - to respond to change, particularly in a dynamic and constantly evolving global economy

A tax system based on such clear principles will minimise administration and compliance costs, maximise tax-take and boost investment and growth. We have already demonstrated our commitment to these principles in bringing forward and enacting legislation for the new Land and Buildings Transaction Tax.

The burden of taxation and the administrative compliance costs form only one - but important - factor in the overall cost and ease of undertaking business in an economy. There is therefore the opportunity to develop taxation policy in conjunction with wider economic policy to create a comprehensive and coherent framework to continue to build upon the competitive business environment in Scotland.

In our preparations for independence we will be guided by the Commission's recommendations. These are:

• the tax system should be built around Scottish circumstances and preferences to help increase productivity and economic growth while meeting the needs of the people of Scotland
• the tax and welfare systems are key levers for tackling inequality - both are strongly interlinked and should be considered as fundamentally part of the same system. Welfare and tax policy should therefore be developed in tandem to ensure policy integration and alignment
• appropriate tax rates maximise receipts by creating the optimal level of economic activity and revenue raising potential. The Scottish Government should assess the optimal balance of tax rates and bases for key taxes, such as business and employee taxes, and levels of government spending
• an open and consultative approach with industry, independent experts, employer groups, the trade unions, and the general public, should be adopted when designing and reviewing the effectiveness of tax administrative policy to ensure the system is comprehensive, inclusive and maximises compliance

Following these recommendations will allow an independent Scotland to design a modern and effective tax system that reflects Scotland's size and circumstances and is better suited to our economic needs.

Transport

Why we need a new approach

Scotland's geographical position makes strong international and cross-border transport links vital for our economic success and our social wellbeing. Connecting Scotland with the world will never be a top priority for a Westminster Government, with its focus on the transport needs of London and the South East. It is only with independence that we can make choices based upon what is right for Scotland and our economy and what is right for communities and the quality of life of our people.

The future of high-speed rail is just one example. Current confirmed plans exclude Scotland and Northern England, with the next phases of high-speed rail only due to connect London with Birmingham in 2026 and then Leeds and Manchester by 2033. While this investment will provide capacity and bring some journey time savings between the Central Belt and London, the economic benefits to Scotland, as well as the North East and far North West of England are marginal compared to those which will accrue to other areas of the UK. Indeed, the Westminster Government's own analysis shows that Aberdeen and Dundee's economies may suffer from such a partial approach^[127].

A similar failure is clear in relation to Air Passenger Duty. Westminster's refusal to devolve Air Passenger Duty to Scotland has hampered our ability to attract new direct flights to Scotland that would improve our international connectivity and could reduce the costs to people and families in Scotland of both holidays and business travel.

The Westminster Government continues to have responsibility for key aspects of transport policy and, just as importantly, takes the final decision on the size of Scotland's budget. This has included a massive reduction in the capital spending available for crucial infrastructure projects in our country. Scotland's ability to support much needed infrastructure development has been hampered by decisions taken elsewhere, both in terms of overall spending limits and in the ways in which we are allowed to spend our money as a result of Treasury rules. This has meant slower progress on vital infrastructure and transport investment than would have been the case as an independent nation.

The opportunities available to Scotland

Independence will provide Scotland with full flexibility and more choices for our transport system. We will be able to assess our capital investment needs and our forward investment based on Scotland's budgetary position, rather than within boundaries set by Westminster. We will be able to consider options such as different ownership models for the rail network, and address issues with Scotland's international connections to the global marketplace, developing our air and sea access to the most important markets.

Since 1999, successive Scottish governments have improved transport within current devolved responsibilities, illustrating the value of decision-making on Scottish priorities for transport within Scotland, and connecting investment in transport with wider policy objectives.

For example, this Government is committed to connecting communities and developing the local and national economies of Scotland through projects such as the Borders Rail link and the Air Discount Scheme.

Following the transfer of some responsibilities for our railways, two new passenger lines and six new stations have been opened and across the network we have seen a 30 per cent increase in passenger use^[128]. Road Equivalent Tariff has been introduced for more island ferry routes and we have been able to take forward major road projects to improve and complete our motorway network.

These actions demonstrate what can be achieved with a limited range of responsibilities and show that Scotland is well placed to respond more effectively to our nation's strategic transport needs with the full powers of independence.

The Scotland we can create

Independence will provide future Scottish governments with the ability to make decisions that suit Scotland's particular transport needs, creating projects and policies that are based on strong evidence of economic benefit and social cohesion.

These new powers can be used to continue the improvements to our transport networks both within Scotland and linking to Scotland. They will support economic and social opportunity by strengthening the connections between urban and rural, island and mainland, national and international, and the people of Scotland and their public services.

Independence will enable us to develop a fully integrated transport system with decision-making on the key issues being taken in Scotland and for Scotland. This means we can move forward with a clear ambition to deliver:

• integration between different modes of travel and different functions
• integration between all the powers of government to support transport and wider objectives
• full integration with the global community of nations

The choices open to us

Future Scottish governments will be able to align transport policy with other policy choices to create a more comprehensive transport strategy covering both national and international connections.

For example, independence creates the opportunity to integrate the transport network fully with the other infrastructure networks that are crucial to growing the economy. We will be able to align transport policy with energy policy to achieve Scotland's ambitious decarbonisation targets. That means the electrification of rail and the development of electric vehicles can work in tandem with the expansion of renewable energy generation and the roll-out of smart grid technologies to drive down transport emissions, enabling Scotland to meet the commitment to achieve the almost complete decarbonisation of road transport by 2050.

There will be an opportunity to decide the best way to structure and support our railways, including the best ownership model for rail and track for the benefit of the people of Scotland.

The Scottish Government is currently procuring a ten-year Scotrail franchise with a five-year review and a separate Sleeper franchise. Both procurement exercises are being expertly run under existing devolved powers by Transport Scotland and have attracted healthy interest. We are confident that they will bring better services to passengers. However, the current franchise model is unnecessarily constrained by the limits imposed by UK legislation. In the future, an independent Scotland will be free to pursue legislation that enabled alternative approaches, including public-supported and not-for-profit models. Enhanced borrowing powers will also provide more options for the delivery of rail infrastructure or rolling stock supporting better value for money.

In addition, independence will give Scottish governments a role when franchises are awarded for cross-border services - currently the Scottish Government has very limited input to these decisions which are made by Westminster alone. This will ensure Scotland's interests are fully represented.

We can use the borrowing potential of an independent country to invest in the condition, reach and connectivity of our roads - achieving the long-term objective of dualling the road network between all our cities by 2030.

And, we can ensure that Scotland's Maritime institutions - such as the coastguard - are structured efficiently and meet the needs of users of Scotland's unique seas and complex coastline.

Our priorities for action

High-speed rail is a key priority. Despite a much stronger business case from a network that includes Scotland and previous calls, not just from the Scottish Government but councils in the North of England and civic and business Scotland too, it is only now that the Westminster Government has agreed to plan for high speed to go beyond Manchester and Leeds. Meanwhile we continue to plan for a high-speed compatible link between Edinburgh and Glasgow that will act as a 'launch pad' for high-speed rail services to the South as well as releasing capacity on existing lines in the Central Belt.

Through substantial investment in the Highland Mainline and the line between Aberdeen and Inverness, along with enhanced inter-city-services delivered through the next franchise, we will ensure that high-speed rail brings benefits to all of Scotland. High-speed rail will also deliver substantially improved connectivity between Scotland and the North of England. Consistent with the Borderlands initiative, an independent Scotland could work together with northern English councils to argue the case more strongly for High-speed to go further North faster. High-speed rail will also attract air travellers from Glasgow and Edinburgh to London, freeing air slots to maintain air access to Aberdeen and Inverness, which with rail improvements will maintain and enhance the connectivity of these economically vibrant cities.

A reduction in Air Passenger Duty (APD) will allow Scotland's airports to be more competitive in attracting new direct air routes and will improve our international connectivity. More direct routes will also enable Scottish travellers to avoid connections via airports such as Heathrow, reducing average household costs for summer holiday flights from Scottish airports. For these reasons, it is essential that the Scottish Government has the power to make decisions on APD in the interests of Scotland.

Ferries are an essential part of Scotland's transport network. The quality of our ferry services impacts on us all, affecting both island and mainland communities. The Scottish Government is fully committed to delivering first class sustainable ferry services to our communities, stimulating social and economic growth across Scotland. The planned improvements to Scotland's ferry services, as set out in our recently published Ferries Plan^[129] will enable our rural and remote communities to thrive, and continue to make a significant contribution to Scotland's economy. With the fully integrated transport system that independence will deliver, we can ensure the best alignment between ferries and other modes of transport.

One key cost to business and consumers is the cost of fuel. Currently around 58 per cent of the cost of petrol and diesel is made up of taxes: as a percentage of pump price, the UK had the highest tax component of diesel prices and the second-highest of unleaded petrol prices of the 28 EU member states in August 2013^[130]. With independence, this Scottish Government will examine the benefits of a introducing a Fuel Duty Regulator mechanism to stabilise prices for business and consumers and how this could be made to work alongside our Scottish Energy Fund.

The Scottish Government is currently responsible for our rail and trunk road networks, major public transport projects and for the national concessionary travel schemes.

In addition, current devolved responsibilities include:

• travel information service
• sustainable transport, road safety and accessibility
• local roads policy
• bus, freight and taxi policy
• ferries, ports, harbours and canals
• the Blue Badge Scheme (for disabled drivers)

After independence, these services and responsibilities will continue as now.

Other transport functions are currently reserved to the Westminster Government, and delivered by 13 UK- or GB-wide specialist transport organisations. For a period after independence, the Scottish Government proposes that these organisations continue to provide their services in Scotland under arrangements with the Scottish Government. These arrangements, some of which will be transitional, will form part of agreements reached with Westminster.

The people of Scotland have contributed to the funding and development of these institutions over many years, and continued use of these institutions, for varying periods of time, following independence - with appropriate financial contributions to their administration, along with an equally appropriate say in their governance - is the sensible approach to ensuring continuity of service immediately following independence.

These include the Motoring Services agencies: the Driver and Vehicle Licensing Agency, Driving Standards Agency, Vehicle and Operator Standards Agency, and the Vehicle Certification Agency. These will initially continue to provide vehicle and driver licensing and testing services to the people of Scotland. However, independence will allow a Scottish parliament to determine the best way to deliver these services in the future. The Scottish Government plans to create a new, streamlined Scottish Motor Services Agency, which will bring together the functions of DVLA, DSA, VOSA, and VCA. By the end of the first term of an independent parliament, we will have completed the design and development work, with a view to the Agency going live early in the second Parliament.

The Maritime and Coastguard Agency and the Northern Lighthouse Board will continue to provide their services for the safety of mariners.

NATS is the air navigation service provider for the UK. It is a public-private partnership, and is 49 per cent owned by the Westminster Government, 42 per cent by the Airline Group (a consortium of seven airlines), five per cent by its employees and four per cent by Heathrow Airport Holdings^[131]. NATS owns and operates a large facility at Prestwick. On independence, NATS will continue its services for Scotland. The Scottish Government will negotiate an appropriate share for Scotland of the Westminster Government's stake in NATS.

The present regulatory authorities for transport are the Office of Rail Regulation (ORR) and the Civil Aviation Authority (CAA). On independence, these bodies will continue to operate in Scotland while the options for regulation are examined further, although the combined economic regulator will cover aspects of ORR's functions^[132]. The same approach will be adopted in relation to the rail passenger group, Passenger Focus. This will ensure there is no disruption to the operations and safety of either rail or air services. Similarly the accident investigation branches, covering rail, aviation and maritime, will continue their operations on independence.

This approach means that drivers, hauliers, airlines and their passengers, rail operators and their passengers, and mariners experience a smooth transition as powers begin to be executed by an independent Scotland or jointly with the rest of the UK, through existing institutions.

As a full member state of the EU, we will be increasingly active in international co-operation in transport policy and regulation, as well as in international transport bodies such as the International Civil Aviation Organisation and the International Maritime Organisation.