Council of Economic Advisers: annual report 2015-2016

Chair's Foreword

I am pleased to present this report from the Council of Economic Advisers on the areas we have considered over the past year. This is the Council's first report to the First Minister since its remit and membership were refreshed in 2015.

The Council's role is to be an independent advisory group to the First Minister. We act as a sounding board for ideas, as a 'critical friend' to the Scottish Government, and put forward suggestions we think may make a difference in areas the First Minister has invited us to consider and advise upon.

Following the Government's Programme for Government for 2014-15, the Council's remit was refreshed. Previously, we were tasked with advising the then First Minister on the recovery and jobs, economic levers, and internationalisation. As the economy has evolved, so too has the Scottish Government's economic agenda. Our remit is now a wider one: we've been asked to advise on actions to improve the competitiveness of the Scottish economy, and also on actions to tackle inequality - the twin pillars at the heart of Scotland's Economic Strategy.

Within this, we have been taking forward a challenging but exciting work programme: advising the Scottish Government on the steps that can be taken to develop and promote inclusive growth, foster a culture of innovation and research, and better measure Scotland's broader economic performance.

Each of these are important facets of the Economic Strategy. They are areas where Scotland faces well-known challenges, but where Scotland also has important strengths, and perhaps the opportunity to be a world-leader.

Take Inclusive Growth, for example. The international evidence is clear - growing inequality is bad for social cohesion and long-term economic growth. Scotland is not alone in facing the inter-related challenges of trying to improve economic performance, broaden economic opportunity, and spread the benefits of growth more equally. However, Scotland is at the forefront of countries building inclusive growth into their economic strategies, with the OECD identifying Scotland as an incubator for an inclusive growth approach.

As a Council, we have been helping the Scottish Government to understand what more can be done to drive inclusive growth. We have drawn on Scottish evidence and international experience to help identify the specific aspects of inclusive growth that are most important for Scotland. We have considered how policy development can be more aligned to achieve inclusive growth ambitions. The Council is encouraged by the Scottish Government's willingness to explore and develop new ideas in this field, which is a central priority for improving Scotland's economic performance. In this vein, the Council has discussed how policies such as the Business Pledge could be developed and expanded in the future to boost its impact, based on both our academic and business expertise.

On innovation, we have brought an international perspective to bear on Scotland's innovation challenges. We know that Scotland is already an innovative country with a number of enviable strengths, such as world class universities, and a number of highly innovative firms across a range of sectors. However, we also know that Scotland's business innovation performance lags behind international competitors across a range of metrics, from expenditure on research and development, to the proportions of businesses that are active innovators. The Council, along with other groups like the Scotland CAN DO Innovation Forum, has considered the challenges in this area, and where the potential avenues for reform may be.

In each of these areas, the Council has brought a wide range of academic and business expertise to bear, backed by a strong Scottish and international perspective. On this basis, we present our assessment and recommendations for the Scottish Government on the key areas of Inclusive Growth, Innovation and measurement of success.

In this report, we give an overview of the evidence we've considered, and the advice we've provided, in each of the workstreams we've taken forward. We also set out some broad recommendations for the Scottish Government in each of these areas.

In this new parliamentary session, the Scottish Parliament will be taking on a number of new powers and responsibilities. The Scottish Government will also face new challenges following the result of the EU referendum, which could have significant implications for Scotland's economic fortunes in the near future and over the longer term. While it is not the main focus of this report, which reflects our work over the past year, the result has implications that cut across a number of areas of economic policy, including those which the Council has been considering. A major focus of the Council over its future programme of work will therefore be to advise the First Minister and Scottish Government on how Scotland can respond to the economic challenges of Brexit in the months and years to come.

I trust that readers will find this report of interest, and that it provides a helpful insight into the work of the Council.

Crawford W Beveridge CBE
Chair, Council of Economic Advisers
October 2016