Building a New Scotland: A stronger economy with independence

The Building a New Scotland Fund

Key points

Independence will unlock opportunities for Scotland. We propose that there should be a Building a New Scotland Fund. This would be a sustainable use of oil and gas revenues and would last for the first decade of independence, to enable Scotland to get off to as strong a start as possible and to lay the foundations for a green, fair and net zero economy.

The aims of the Fund would be:

1. enabling the transition to net zero emissions and environmental sustainability

2. driving inclusive economic growth

3. building resilient and sustainable places.

The case for a Fund

Investment is crucial for any economy, and it would be particularly important as Scotland became independent for there to be a targeted boost to infrastructure investment.

We would undertake capital spending of up to £20 billion over the first decade of independence, supported by assigning key revenues into a Building a New Scotland Fund.

Doing so would reinforce our existing Infrastructure Investment Plan.^[159] Targeted investment on this scale would boost the Scottish economy (see Box 9). It would also help reduce inequality and support the delivery of our climate targets, thereby accelerating our move to net zero. And it would send a clear signal that Scotland is confident, open and ready to take its place in the world.

Box 9: Infrastructure investment

There is a strong body of evidence that supports the link between economic infrastructure spending and higher economic growth.^{[160], [161], [162]}

Infrastructure investment can boost the economy in two main ways:

• directly in the short term, for example, through employment and purchasing inputs from other sectors
• indirectly in the long term, by raising the productive capacity of the economy, by reducing transaction and other costs, and enabling more efficient spending.

The main channels through which infrastructure enables economic growth are shown, in Figure 10, below:^[163]

Figure 10 How infrastructure investment enables economic growth

Market Impacts

• Facilitating the development of key sectors and tecnologies
• Improving private sector competitiveness
• Unlocking private sector capital and investment

Social and Environmental Impacts

• Reducing regional disparities
• Reducing emissions
• Improving environmental quality and improving health and wellbeing

Demand Side Economy Impacts

• Stimulating through the construction phase itself – supporting jobs, purchasing inputs
• International demand spillovers

Supply Side Economy Impacts

• Improving productive capacity in the economy
• Enhancing productivity, labour market and skills

Supporting the Foundations of Economic Activity

Scottish Government modelling of an investment package in Scotland^[164] has shown that a fund of an equivalent scale and scope to the proposed Building a New Scotland Fund would have both a short-term demand effect and a longer-term supply effect by increasing long-term productive capacity and providing a sustained boost to the economy. This finding accords with OECD modelling.^{[165], [166]} The improvement in capital stock would be a key driver of economic impact.^[167]

This modelling showed that after five years, an investment package of £1.56 billion a year could lead to the Scottish economy becoming between 0.5% and 1% larger at the end of the programme than it would otherwise be. Over 15 years, this is equivalent to increasing the size of the economy by between £10 billion and £25 billion, at 2017 prices.

The aims of the Fund

The Fund would build on the Infrastructure Investment Plan (IIP) vision for infrastructure investment:

"Our infrastructure supports Scotland's resilience and enables inclusive, net zero, and sustainable growth".^[168]

We would also seek to align the Fund’s priorities with the European Commission’s priorities. For the period 2019 to 2024 these are: to transform the EU into a modern, resource efficient, climate-neutral, and competitive economy; to embrace digital transformation; and to strengthen the EU economy while protecting jobs and reducing inequalities.^[169]

We set out below the strategic aims of the Fund, and ways in which it could be used. It is important that the uses of the Fund are targeted effectively, in light of the economic and social priorities of the time, and new investment opportunities which might arise.

To ensure this, the Scottish Government would engage collaboratively with the Scottish Parliament and wider Scottish society, including businesses, trade unions and third sector groups, to determine the specific types of investment that would be supported by the Fund, which may include public sector and community-owned projects.

The three strategic aims of the Fund would be consistent with those of the IIP:^[170]

One Enabling the transition to net zero emissions and environmental sustainability

We recognise the scale of the challenge that reaching net zero carbon emissions poses. Public infrastructure investment has a critical role to play in tackling the crises of climate change and biodiversity loss.

The costs of the transition to net zero exceed what is affordable from taxpayer funding, even with the greater fiscal powers of independence. Private sector investment is already playing a part. Government can play a key role in shaping the markets to attract such capital at scale and to achieve policy outcomes such as ensuring a fast, just transition – where the journey to net zero is fair and creates a better future for everyone – and that communities share the benefits. We would continue to explore how government investment can lever in private capital and jointly deliver on our priorities with the private sector.

Projects that would help to deliver on Scotland’s net zero emissions objectives include:

• decarbonising Scotland’s housing stock, cutting fuel bills and reducing fuel poverty through the roll out of programmes to replace gas boilers with zero emission heating systems and connections to heat networks. Improving the energy efficiency of our domestic and non-domestic buildings and transforming our building stock, will be essential to meeting net zero targets. Helping to tackle energy poverty and reduce energy costs for consumers and businesses would protect the poorest and most vulnerable from rising energy costs
• securing low carbon, lower price energy by facilitating development of pump storage hydro projects in Scotland. This could help to increase security of supply in Scotland and replace reliance on gas with low carbon, lower price energy in the long term. It would help improve energy self-reliance, balance intermittency in renewables and reduce the need for electricity imports to meet peak demand. There are a range of sites and projects which could be developed in Scotland. As part of the Fund process we would examine which developments would represent best value for money
• accelerating the development of a major new industry by investing in hydrogen production, transportation and storage. This sector is not yet fully established, but it is expected in the long term to provide a renewable source of energy, both for domestic and, crucially, export markets
• setting up a Zero Emissions Transport Transition Fund to support the decarbonisation of transport, improving connectivity and quality of life. This could support investment in public transport networks, helping to clean up city centres and accelerating the transition to 20 minute neighbourhoods. Where appropriate, the Fund could also support investment in zero emission transport fleets and infrastructure, helping businesses with the transition to net zero.

Two Driving inclusive economic growth

We can improve quality of life, boost productivity and competitiveness, and create good green jobs by enhancing transport and digital connectivity and capacity in all areas of Scotland and by stimulating innovation. We would embed fairness and inclusion in funding decisions, ensuring no-one is left behind.

Projects that would drive inclusive growth include:

• digitally connecting remote, rural and island communities and reducing digital exclusion. Multi-year investment in broadband and mobile connectivity across Scotland's remote, rural and island communities would support economic development and lower digital exclusion. Scotland is likely to have a disproportionate number of ‘Very Hard to Reach’ premises that will not be reached by current Westminster-funded gigabit capable rollout. Geography should not be a barrier to getting online and benefitting from access to digital technology
• improving access to Stranraer and Cairnryan. These are important gateways to Scotland for ferry passengers and freight. Ensuring safety, resilience and reliability are key factors. Improving the transport assets here could support regeneration of the South West of Scotland and benefit the economy and local communities across the region
• strengthening the competitiveness of the Scottish supply chain and supporting the shift of freight from road to rail. Capital grants could support the development of rail freight terminals with the aim of improving reliability, export capabilities and the decarbonisation of freight transport in Scotland.

Three Building resilient and sustainable places

Making Scotland fairer starts at the local community level. The Fund would invest to meet the diverse economic, social and environmental needs of urban, rural and island areas.

Policies that would help to deliver resilient and sustainable places include:

• building and renewing homes to help ensure everyone has a home they can afford to live in. An independent Scotland would be able to determine the investment needed for affordable housing over the longer term as multi-year budget planning would no longer be determined by the Westminster budget cycle. Longer-term investment plans would give confidence across the private and public housing sectors to plan for delivery and investment. Significant investment in affordable housing, including in rural areas, is critical if we are to support all communities to thrive and to address Scotland’s projected population decline as part of the UK
• increasing support for communities to own assets and exert more influence over their use. This could include, for example, the re-purposing of under-utilised or vacant assets; or local renewable energy developments as set out later in this publication, with benefits to local communities such as access to lower cost energy, including in rural areas.

Financing and delivering the Fund

This investment would be an entirely one-off spending on infrastructure projects.

Day-to-day resource spending on public services would be met within fiscal rules as discussed earlier in this publication.

To ensure effective delivery of this fund we would ensure that the necessary fiscal institutions were established and operating cash management facilities, as set out earlier in this publication.

The Fund would reinvest oil and gas revenues, alongside other windfall income, in the productive potential of the Scottish economy. Over the last five years, revenue has averaged around £1.5 billion a year, although receipts have been variable and have increased significantly in recent months. Given the volatility and uncertainty surrounding North Sea revenue, we would, if necessary, borrow to invest to meet the remaining element of the Fund and ensure investment needs are met.

Choices over the use of oil revenues following the Building a New Scotland Fund would be for the government of the day, but the Scottish Government would retain the option of diverting revenues into a Sovereign Wealth Fund.

We recognise the importance of fiscal sustainability and would undertake investment according to the fiscal and economic circumstances at that point in time.

We would ensure that spending was appropriate for economic conditions and designed to deliver maximum benefit to the Scottish economy, households and supply chain.

The package would be balanced to ensure that spending supported economic growth while not exacerbating inflationary pressures.

The balance of investment between different types of activity, sectors and markets would determine the precise level of economic benefit realised from the Fund. We would therefore put in place a rigorous process to assess the value for money of individual investment projects within the Fund, as well as their compatibility with relevant regimes for controlling state subsidy.