Council of Economic Advisers: annual report 2015-2016

6. Summary of Council Advice

In its considerations thus far, the Council has put forward a range of advice to the Scottish Government in each of its workstreams. These are broad, so as to help guide the Scottish Government's thinking in each of these areas, and support the development of the evidence base Scotland needs to progress in these areas.

The Council's advice is grouped under the Council's three workstream themes: Inclusive Growth; Innovation; and Measures of Economic Progress.

Inclusive Growth

The Council welcomes the emphasis that the Scottish Government's Economic Strategy places on Inclusive Growth, and the Scottish Government's ambition to more closely align and integrate its approach to economic and social policymaking.

Moving forward, we recommend that the Scottish Government reaffirm its position on inclusive growth as a commitment to long-term transformational change for Scotland's economy and its people. This means that the Government should focus on supporting creation of more and better quality jobs, and ensuring that everyone has the opportunity to fulfil their potential and contribute to society.

The Council also notes the initial steps the Scottish Government has been taking to develop policy tools such as the Inclusive Growth policy framework, which are intended to identify how individual policies might support both inclusion and growth, and where trade-offs might arise, as well as early work around developing an inclusive growth diagnostic for Scotland. The Council is interested in this work, which has the potential to help identify the barriers and constraints to inclusive growth across Scotland, and assist with policy prioritisation. We would encourage the Scottish Government to continue to take forward the development of its proposals for an inclusive growth diagnostic, and to look to reflect the importance of geography and place within it.

Inclusive Growth is an important emerging policy area within Scotland, but also across the UK and internationally. Scotland has begun to be recognised as a leading nation with regard to this agenda. This opportunity should be harnessed, and we would encourage the Scottish Government to continue to engage within Scotland and beyond, including with international organisations, to build on this progress.

In terms of specific policies, the Council has been interested in the development of the Business Pledge, which has the potential to encourage valuable corporate behaviours among Scotland's business base. To date, business sign-up to this policy has been relatively small-scale. To build on its initial roll-out and early uptake, the Council believes that the Scottish Government should pro-actively engage with a wide range of business stakeholder organisations, particularly Chambers of Commerce, to understand the challenges businesses may face, and encourage business-led approaches for driving increased uptake and behaviour change.

An important factor in supporting further uptake of the Business Pledge will be the evidence of what benefits it will bring to participating businesses. Building a credible evidence base around the effects of the Business Pledge (or similar initiatives elsewhere) on business performance, staff retention and productivity is an essential part of convincing the wider business community of the value in adopting the progressive corporate behaviours that it emphasises. We recommend that the Scottish Government seek to develop the Scottish evidence base, with a particular focus on case studies of impacts on individual businesses.

Innovation

The Council agrees with the priority that the Scottish Government has placed on improving Scotland's innovation performance. The evidence we have considered to date shows that Scotland has a number of significant strengths, but that there is substantial room for improvement in the innovation performance of Scotland's business base.

We recognise that there is a limit to what the Scottish Government and its agencies can do themselves to improve the innovation performance of Scotland's businesses. This will require sustained changes from within the business base itself, and will be shaped by the sectors and markets they operate within. However, the Scottish Government and its partners have a vital role in articulating a vision and ambition for innovation in Scotland; in identifying and communicating a broader mission for public and private sector innovation activities in Scotland; and encouraging public and private sector activity to address these challenges.

Given the complexity of the innovation landscape that Scottish firms operate in, it is essential that support offered by the Scottish Government and its partners supports and builds on Scotland's strengths, and avoids duplication and creating additional complexity. We therefore support the Scottish Government's intention to simplify the innovation landscape in Scotland and better align the innovation efforts of the partners working within it. However, to guide and support this, we would encourage the Scottish Government to develop a clear ambition for innovation in Scotland, and to identify a set of missions for innovation in Scotland, based on an assessment of Scotland's assets and areas of expertise.

It is vital that reforms to Scotland's innovation ecosystem are based on robust evidence. The Council believes that the Scottish Government and its partners should continue to improve the evidence base on Scotland's innovation performance. In particular, we would strongly support undertaking an assessment of the operation of Scotland's innovation system. Although recognising that an assessment was undertaken within the last ten years, the Council believes that a further assessment would be useful at this stage, in order to in order to identify potential bottlenecks or missing links in the system, and to identify any significant vulnerabilities or areas for strengthening.

The Council also supports further development of the data available on innovation for Scotland. We are encouraged by the on-going development of the data available on Scotland's innovation performance through the boosted Community Innovation Survey. We would support greater analysis of the innovation performance of Scotland's medium-sized companies, and encourage the Scottish Government to investigate how to develop Scottish data on total factor productivity, and on capital stocks and investment. We would also encourage further work to increase the evidence base around the effectiveness and impact of existing innovation policies.

One area of particular interest to the Council is how Scotland encourages young people to engage with and study Science, Technology, Engineering and Maths ( STEM). We have been impressed by the work being taken forward by Scotland's academic institutions, and recognise that efforts are being undertaken within Scotland's wider education system to encourage participation in STEM subjects. However, given the fast-moving nature of the digital economy, and the importance of people having STEM skills and knowledge to business's ability to make the most of the opportunities it presents, it is vital that education in these areas is attractive, flexible, and responsive to technological developments. We would encourage the Scottish Government to review the initiatives being undertaken other countries encouraging young people to participate in STEM and digital activities and gain knowledge, skills and confidence in their use, to ensure that Scotland's efforts in this area are comparable with the best in the world.

Measures of Economic Progress

The Council's third workstream has centred on measurement of economic progress, particularly around the Ambitions set out in the Economic Strategy: for Scotland to rank in the top quartile of the OECD in terms of productivity, inequality, wellbeing and sustainability.

We welcome the recent refresh of the National Performance Framework, which has incorporated the proposals we supported regarding the measurement of productivity and inequality. The measure used for the Scottish Government's Solidarity target now allow for direct comparisons between Scotland and other OECD countries, which helps to measure progress towards achieving the inequality pillar of the Economic Strategy.

There has also been progress with regard to measurement of the Economic Strategy's wellbeing ambition. We support the continued use of the National Performance Framework as a broad framework for measuring wellbeing in Scotland, as its 'dashboard' approach is in line with international good practice, and the indicators it contains are likely to be more closely aligned to priorities in Scotland than those used in international comparators of wellbeing. However, there is substantial value from placing wellbeing in Scotland in an international context, through use of measures comparable to those in the OECD's Better Life Index. The Council advises that the Scottish Government uses a 'twin track' approach to measuring Scotland's wellbeing, based around on-going measurement through the National Performance Framework, and an annual assessment of Scotland's position through the OECD Better Life Index indicators.

As we note in Chapter 4, frameworks for measuring Sustainability, along the lines of a capitals-based approach, are currently under development internationally. The Council believes that moving to a broader measurement approach for Sustainability would be of value to Scotland. We would support the establishment of a programme of work to develop appropriate measures of sustainability for Scotland, and to undertake international comparisons once appropriate frameworks become available.

Future Work of the Council

The Council will continue to act as an independent advisory council to the First Minister, on actions to improve the competitiveness of Scotland's economy, and tackle inequality. We will continue to advise the First Minister on issues related to inclusive growth and innovation, and will look to respond to the First Minister's request for our advice around aspects of the Additional Rate of income tax.

It is widely recognised that the result of the EU referendum, and the potential for changes to Scotland's position in the EU, could have significant implications for Scotland's economic fortunes in the short term, and its economic competitiveness in future years. Membership of the European Union has been a fundamental feature of Scotland's economy for several decades; changes to this relationship could therefore by their nature have profound consequences for a number of areas of economic policy in Scotland.

The Council will look to advise the Scottish Government on the economic challenges arising from Brexit, with the specific issues we focus on being guided by the priorities of the First Minister and Scottish Government.