Council of Economic Advisers: Chair's report 2016-2018

1 - Introduction

Purpose of report

This report aims to provide an overview of the evidence considered, and discussions had, by the Council of Economic Advisers from August 2016 to March 2018. This follows on from a previous report published in October 2016 ^[1]. The evidence includes Scottish Government analysis, official reports, and additional material used to inform the discussions. Chapters 3-5 outline the discussions across the three Council workstreams: Inclusive Growth, Innovation, and Fiscal Matters. This report was drafted by the Council Secretariat on behalf of the Chair and Council members.

Associated recommendations are set out at the end of each chapter.

Role of the Council

The Council of Economic Advisers is an independent advisory group to the First Minister. In this role, we provide advice on Government policy and direction, based on robust data and evidence, with members drawing on a diverse range of expertise. We thereby act as a critical friend, providing constructive challenge and putting forward suggestions, which members of the Council believe could strengthen the Scottish economy, and thereby improve the lives of the people of Scotland.

Our overarching remit is to provide advice to the First Minister and the Scottish Government on actions to improve the competitiveness of Scotland's economy, and to tackle inequality. These are the central pillars of Scotland Economic Strategy ^[2], published in 2015.

Within this broad remit, we take a closer look at three key areas. The first two are inclusive growth and innovation. Over 2015-16, the third workstream was focussed on measures of economic progress; this was replaced in late 2016 with a workstream on fiscal matters. This workstream initially focussed on analysis of revenue risks and possible mitigating actions associated with differential additional rates of income tax between Scotland and the rest of the UK.

History of the Council

The Council of Economic Advisers was established in 2007 with the aim to advise Ministers on improving Scotland's competitiveness on the world's stage. In 2011, the Council scope was reshaped following the financial crisis, and tasked with advising the then First Minister on the economic recovery, jobs, economic levers, and internationalisation.

The Council's membership and remit was further refreshed following the Scottish Government's Programme for Government 2014-15 and the appointment of the current First Minister, to reflect on the delivery of Scotland's Economic Strategy published 2015. The membership of the Council continued to evolve over this period.

Membership of the Council

The Council consists of academics, business leaders, and thinkers from a range of backgrounds. There is no remuneration provided for their work on the Council and the time and commitment provided.

The membership over the time covered in this report is as follows:

• Crawford Beveridge (Chair)
• Amanda McMillan
• Harry Burns
• James Mirrlees
• Sara Carter
• Anton Muscatelli
• Mariana Mazzucato
• Frances Ruane
• Jim McColl
• Joseph Stiglitz

A full list of our members and their biography is available in Annex A. Council members are also involved in a number of other commitments. Harry Burns carried out an independent Review of Targets and Indicators for Health and Social Care in Scotland ^[3], published in November 2017. Anton Muscatelli chaired the Standing Council on Europe, which Amanda McMillan and Frances Ruane were members of. Frances Ruane was also on the Enterprise and Skills Ministerial Review Group, and Sara Carter sits on the Enterprise and Skills Strategic Board created in November 2017. In addition, Mariana Mazzucato was on the Strategic Board of the Implementation Plan for a Scottish National Investment Bank.

In January 2018, both Amanda McMillan and Professor Frances Ruane stood down from their role on the Council. Professor Sir James Mirrlees also stepped away from the Council in early 2018. Amanda McMillan, former Chief Executive Officer of Aberdeen, Glasgow and Southampton (AGS) Airports, joined the Council in January 2015. Since then, she has provided important advice from a business perspective, particularly around businesses interaction with inclusive growth ambitions.

Professors Frances Ruane and Sir James Mirlees have been members of the Council since its creation in 2007 and have contributed extensively to Council advice. In particular, both were involved in the Fiscal Commission Working Group to advise the Scottish Government on a macro-economic framework for an independent Scotland. These were highly valued by the Scottish Government in providing clear recommendations and informing the wider public debate.

More recently, Frances expertise has been invaluable while serving on the Enterprise and Skills Review and the Standing Council on Europe. In 2010, Sir James led the Mirrlees Review investigating a tax system for the 21st century. His insight into tax structures and rates has been invaluable in guiding the Scottish Government analysis into the potential impacts of raising the Additional Rate of Income Tax.

Council Engagement's over 2016, 2017, and 2018

The Council aims to have two full meetings a year where we are joined by the First Minister, Cabinet Secretary for Economy, Jobs, and Fair Work, and the Cabinet Secretary for Finance and the Constitution.

Since summer 2016, the Council have met on three occasions and participated in five conference calls. In 2017, only one meeting took place due to Scotland's Inclusive Growth Conference (organised by the Scottish Government) in October, at which a number of Council members participated. The three meetings took place on the following dates:

• 18^th - 19^th August 2016
• 26^th - 27^th January 2017
• 18^th - 19^th January 2018

In advance of our meetings and calls, officials provide us with relevant data and analysis to inform discussion. Minutes of our meetings are available on the Scottish Government website at:
/groups/Council-of-economic-advisers/

The Chief Economist also had a number of one to one engagements with Council members. The First Minister and Chief Economist met with Professor Joseph Stiglitz in October 2017 in Edinburgh. The First Minister had also met separately with Professor Stiglitz in New York earlier in 2017. The First Minister met with Amanda McMillan in January 2018. In addition, Professor Anton Muscatelli hosted the Inclusive Growth Conference at Glasgow University in October 2017, which Crawford Beveridge also attended. Professor Sir Harry Burns and Professor Sara Carter spoke at the conference and following on from this, have participated in the development of an international wellbeing forum in 2018.

In January and March 2018, Professors Anton Muscatelli, Sara Carter, and Harry Burns gave evidence to the Economy Jobs and Fair Work Committee on the topic of Scotland's Economic Performance. Jim McColl also gave evidence, but not in a Council capacity.

Main Discussion Topics over 2016, 2017, and 2018

Across inclusive growth, discussion focused on the diagnostic approach to investigating constrains to inclusive growth, notably used during a pilot project in North Ayrshire. Importantly, we also contributed to the development of the content for Scotland's Inclusive Growth Conference, and more recently on the establishment of Scotland's Centre for Regional Inclusive growth (SCRIG).

Within the innovation remit, focus rested on discussing the role and opportunity of a national investment bank for Scotland.

Fiscal related discussions took a significant part of our time, particularly across 2017, with considerable analysis undertaken by Scottish Government analysts to model the impacts of a 5 pence increase to the Additional Rate of Income Tax.

Progress across Recommendations set out in Chair's Report 2016

In the Council report published in 2016, we set out 11 broad recommendations across the three workstreams focused on at that time: Inclusive Growth, Innovation, and Measures of Economic Progress. Annex B contains a Scottish Government response on progress.

In reviewing the response, the Council notes the progress made across the period against the 2016 recommendations. Significantly, we are encouraged by the collaborative work carried out to develop the North Ayrshire Inclusive Growth Diagnostic Pilot. This has gained worthy note across Scotland and the UK for the approach to ascertain constraints and then develop policies for inclusive growth. Indeed the extensive engagement within and outwith Scotland on inclusive growth is commendable, building on best practice to ensure an effective approach to moving towards inclusive growth in Scotland. Schemes such as the Business Pledge continue to set Scotland apart in thinking beyond traditional methods for business incentives, though there is scope for increased engagement with business.

Across innovation, in terms of policies we are encouraged by the continued recognition in the Scottish Government of the importance of innovation for a healthy economy. The focus on projects around encouraging young people into STEM subjects is good, and will continue to be vital in the coming years. New ways of boosting Scottish innovation have revitalised the innovation landscape in Scotland; including CivTech, which seeks to address public sector challenges through galvanising private sector innovative ideas. In addition, the Enterprise and Skills Review has been pivotal in putting in track greater alignment innovation support across Scottish Government and its partners.

Measuring economic progress continues to be important to the Scottish Government, and we note and welcome the refreshed National Performance Framework^[4], which has enhanced wellbeing, as well as sustainable, inclusive economic growth at its heart.