Council of Economic Advisers: annual report 2015-2016

5. Measures of Economic Progress ^[45]

Scotland's Economic Strategy sets out ambitions for Scotland to be in the top quartile of OECD countries for productivity, inequality, wellbeing, and sustainability. It also included the commitment towards:

"…a programme of work, to be undertaken in conjunction with the new Council of Economic Advisers, to develop a set of measures of Scotland's performance across a wider range of dimensions of economic prosperity to enable us to achieve a better assessment of progress."

The Council's workstream on measures of economic progress has concentrated on improving the way in which the Scottish Government measures productivity and inequality, and considering approaches to monitoring wellbeing and sustainability in a relevant and internationally comparable way.

The Council's considerations in this area are informing the on-going work to refresh of Scotland's National Performance Framework, and the online monitoring system Scotland Performs, which will be used to monitor progress against the delivery of Scotland's Economic Strategy.

Productivity

Scotland's Economic Strategy sets out an ambition for Scotland to rank in the top quartile of OECD countries in terms of productivity. The Scottish Government's existing Purpose Target on productivity is to rank in the top quartile of OECD countries in terms of output per hour worked, by 2017. The Council's advice on measurement of productivity has therefore focussed on minor changes to improve the quality of the existing measure.

Progress towards the existing target has traditionally been reported by measuring changes in the gap between productivity levels in Scotland and the closest ranked country in the top quartile of the OECD. A reduction in the gap is considered an improvement in performance, whilst an increase in the gap is considered as a worsening of performance.

This methodology allows a straightforward assessment of how close Scotland is to the top quartile of the OECD in relative terms. However, the focus on the size of the gap means that key changes can be missed. For example, other countries can overtake Scotland in the rankings without the gap between Scotland and the top quartile changing. In addition, changes in Scotland's ranking are not straightforward to interpret, as external factors such as changes in currency markets and Purchasing Power Parities have significant impacts on relative nominal productivity.

The Council has considered how the approach to measuring productivity could be improved. In order to allow a more direct assessment of progress towards the productivity ambition, Council members support a proposal to focus on Scotland's rank in the OECD panel, rather than the relative gap with the top quartile. An increase in Scotland's ranking would be considered an improvement in performance, and vice versa.

In addition, Council members support a proposal to include a supplementary indicator that will allow for monitoring of real terms changes in Scottish productivity in the latest year. The additional focus on real productivity growth will help to explain the underlying drivers of changes in Scotland's relative productivity ranking, and to identify whether changes are due to Scotland's productivity performance improving or competitor's performance worsening, for example. ^[46]

Inequality

To monitor progress towards the inequality ambition in the SES, the Council has considered a range of income inequality measures. The Scottish Government's existing approach to measuring income inequality was captured in the Solidarity Purpose Target, which aimed to: increase overall income and the proportion of income earned by the three lowest income deciles as a group by 2017.

This approach to measuring income inequality is easy to interpret; reflects the resources of the poorest households in society; and the condition of increasing overall household income ensures that decreases in inequality do not arise purely as a result of lower overall income. However, this measure is not internationally comparable, and would not therefore allow for monitoring of Scotland's progress towards ranking in the top-performing quartile of OECD countries in terms of inequality.

In order to monitor progress towards the inequality ambition in the SES, the discussion focussed on alternative measures of income inequality that would allow for international comparisons to be made, including the Gini coefficient and the Palma ratio. A brief summary of the comparisons made between the possible measures is presented in Table 3.

Table 3: Comparison of possible measures of income inequality

	Existing Measure	Palma Ratio	Gini Coefficient
Description	Share of total income earned by the bottom three income deciles, and growth in total income.	Ratio of income earned by the top 10% of earners divided by the share earned by the bottom 40%	Distribution of income across the entire population, ranging from 0 (perfect equality) to 1 (complete inequality)
Pros	Straightforward to understand Reflects the resources that are available to the poorest in society Compares the income of the poorest to the total income of the populations	Internationally comparable, with timely annual data for OECD countries. By focussing on the bottom 40%, Palma has straightforward implications for domestic policy aimed at increasing sustainable employment, improving economic opportunities and improving working conditions etc. Reflects how the poorest in society compare to the richest	Internationally comparable, with timely annual data for OECD countries Widely used and recognised Includes the entire population
Cons	Not internationally comparable Does not represent the 'gap' between the richest and poorest households, and whether this has changed The measure is most sensitive to the income of the top decile.	Most sensitive to changes in the incomes of the top deciles. Shifts the focus on to incomes of the top decile, compared to the existing measure.	Difficult to interpret changes in the Gini, or to see where in the distribution policies are having an impact More sensitive to incomes in the middle of the distribution, so the Gini can improve due to improvements in the income for those near the median without benefitting the poorest households.

From an assessment of the options, the Palma ratio - the ratio of income earned by the top 10% of earners divided by the bottom 40% of earners in the income distribution - is recommended as the headline measure of income inequality in Scotland.

The Palma ratio is internationally comparable, with annual estimates published in the OECD database ^[47] , allowing for monitoring of progress towards the SES ambition. Compared to the existing approach in the Solidarity Purpose Target, the Palma ratio clearly shows the scale of the difference in income levels between the top and bottom of the income distribution, whereas the existing approach was focussed only on the bottom 30 per cent.

The Council agree that the focus on the bottom 40 per cent of the income distribution reflects the wider ambitions around tackling inequality contained in the SES. In addition, international commentary has noted that that policymakers ought to be concerned with the bottom 40 per cent of the income distribution more generally, who may be at risk of failing to benefit from the recovery and future growth. ^[48]

The revised measure of income inequality continues to target increases in overall income, to ensure that reductions in inequality are not just arising through lower overall income. ^[49]

Wellbeing

The Council's remit around measuring wellbeing has been to advise on a framework that allows for international comparisons of key wellbeing dimensions, whilst also reflecting Scottish-specific priorities for wellbeing.

The measurement of wellbeing has gained growing attention internationally in recent years, with organisations such as the OECD and the ONS taking forward programmes of work to develop wellbeing measurement frameworks. Wellbeing is considered to be a multi-dimensional concept, considering outcomes in people's lives across a number of domains such as health, the environment, work-life balance and quality of life, for example.

Wellbeing in Scotland is portrayed through the National Performance Framework ^[50] ( NPF), which is made up of a range of indicators and targets covering aspects of the economy, the environment, health, society and other areas, which can be used to give an indication of the successes of policy in Scotland. The indicators in the NPF reflect outcomes relating to the priorities of the Scottish Government. However, many of the indicators are Scotland-specific and cannot be used to show how Scotland compares directly with OECD countries against factors influencing wellbeing.

The Council has considered how the Scottish Government's approach to measuring wellbeing might be adapted to allow for international comparisons, with a focus on the OECD's framework for wellbeing, the Better Life Initiative ^[51] (BLI).The BLI is a multi-dimensional measurement framework comprising twenty-three indicators, which span eleven dimensions across two domains:

• Material living conditions (income and wealth; jobs and earnings; and housing conditions); and
• Quality of life (health status; work-life balance; education and skills; Social connections; civic engagement and governance; environmental quality; personal security; and subjective wellbeing)

The OECD publish comparisons between member countries for each of the wellbeing indicators in the How's Life? report ^[52] . A summary of Scotland's performance against these indicators and an indication of where Scotland would rank in the OECD panel for a selection of the BLI indicators is presented in Table 4.

Following the OECD methodology and definitions, this analysis finds that Scotland performs better than the OECD average for the majority of indicators for which directly comparable data is available, including in employment and unemployment rates, educational attainment of the adult population, and perceived health status, for example. Scotland would rank in the best-performing quartile of OECD countries in terms of annual exposure to air pollution, but performs worse than the OECD average on life expectancy.

Table 4: Scotland's performance against OECD Better Life Initiative indicators ^[53]

Theme	Indicator	Scotland's performance and ranking		Theme	Indicator	Scotland's performance and ranking
Jobs & earnings	Employment rate (15-64)	71.4% (2014)	11 th (out of 35)	Health status	Perceived health status [Share of population reporting general health as 'good' or 'very good']	74% (2013)	13 th (out of 35)
					Life expectancy at birth (years)	79.3 (2013)	25 th (out of 35)
	Long-term unemployment rate (12 months+)	2.2% (2014)	18 th (out of 34)	Education and skills	Educational attainment of the adult population Share of 25-64 population with at least upper secondary education	83.5% (2013)	14 th (out of 35)
	Probability of becoming unemployed (Annual inflow into unemployment as a share of employment in the previous year)	4.39% (2014)	13 th (out of 34)		Cognitive skills of 15 year old students Mean score from OECD PISA	506 (2012)	14 th (out of 35)
Housing	Average number of rooms per person	1.9 (2011)	10 th (out of 35)	Safety	Deaths due to assault Rate per 100,000 people	1.4 (2012)	27 th (out of 35)
Environment	Annual exposure to PM 2.5 air pollution (µg/m³)	7.0 µg/m³ (2010 - 12)	8 th (out of 35)	Civic engagement	Voter turnout Share of registered voters voting in the most recent general election	71.09% (2015)	16 th (out of 35

Noting this analysis, the Council considered the indicators reported on in the OECD wellbeing framework to be sensible headline measures for comparing countries internationally across a number of dimensions of wellbeing. However, as wellbeing has country-specific dimensions, the Council agree that the OECD indicator set is not largely representative of the main priorities in Scotland for the wellbeing of individuals.

Sustainability

The Council has considered how the Scottish Government's approach to measuring sustainability could be improved to allow a wider view of sustainability whilst maintaining international comparability to monitor progress towards the SES ambition.

The Scottish Government's existing Sustainability Purpose Target ^[54] aims to reduce greenhouse gas emissions in Scotland by 80% by 2050, relative to a 1990 baseline.

The Council's discussions have considered how the measurement of sustainability in Scotland could be broadened out beyond emissions to assess the Scotland's ability to maintain its productive capacity across the longer term, in line with international approaches such as that advocated by the joint UNECE/ OECD/Eurostat Taskforce on Measuring Sustainable Development ( TFSD). ^[55]

The TFSD propose a capital approach to monitoring sustainability, based on a dashboard of physical and monetary measures of economic, natural, human and social capital. Measuring sustainability using this approach would include monitoring the stocks and flows of the assets which underpin long-term development, and the risk factors which threaten them.

However, frameworks for monitoring sustainability using a capital-based approach are in the early stages of development, and indicators for monitoring stocks and flows of these resources, particularly in social and natural capital, are yet to be defined. In addition, country coverage, international comparability and data quality act as a limitation to making assessments of sustainability between countries ^[56] .

As part of the March 2016 update to the National Performance Framework, a Natural Capital Asset Index for Scotland ( NCAI) ^[57] has been added to the indicator set. The NCAI analyses changes in the quality and quantity of natural habitats, according to their potential to deliver ecosystem services and health benefits, which are important for wealth creation and wellbeing in the future.

The Scottish Government is also defining its approach to monitoring delivery of the United Nations Sustainable Development Goals ^[58] ( SDGs), an international action plan to tackle poverty and inequality and promote sustainable development across the world by 2030. The SDGs provide a broad framework for sustainable development, and individual countries are invited to embrace and focus on what is most relevant to them.