Europe 2020: Scotland's National Reform Programme 2018

Chapter 2: Sustainable Economic Growth

The overall purpose of Europe 2020 is to deliver, smart, sustainable and inclusive growth. The Scottish economy strengthened in 2017 despite challenging economic conditions that continue to be dominated by heightened uncertainty relating to the UK’s withdrawal from the EU.

Scotland’s economy grew 0.8% in 2017, rising from 0.2% growth in 2016. While the pace of growth remains below its long run trend rate, the strengthening over the year was supported by continued growth in the services sector alongside a return to growth in the production sector. The construction sector contracted in 2017 as it continues to adjust back to its long run trend following exceptionally fast growth in 2015.

Scotland’s employment, unemployment and inactivity rates are strong given the backdrop of Brexit and below trend economic growth. The latest data for February to April 2018 shows that the number of people in employment increased by 18,000 over the year to 2.64 million. This is 78,000 more than the pre-recession peak (March-May 2008).

The stronger economic performance over the past year has been supported by improving confidence in the oil and gas sector, while the pick-up in global growth alongside the lower value of Sterling signals that the international context is also more supportive for growth.

Independent forecasts present a slightly stronger outlook for growth over the next couple of years, however the pace of growth is expected to remain below its long run trend rate. GDP is forecast to grow by between 0.7% and 1.4% in 2018, with slightly higher growth in 2019 of between 0.9% and 1.6%.

Uncertainty surrounding Brexit is raised as a key factor affecting the economic outlook across all the forecasts. In the short term, there are signals from some business surveys that while business optimism has improved over the past year, business investment intentions are fragile during this period of heightened uncertainty.

Alongside this, pressure on household finances and on-going weaknesses in Scottish consumer sentiment also feature as risks to growth over the coming year.

A regular assessment of conditions in the Scottish economy is provided in the Scottish Government’s Chief Economist’s State of the Economy publication.

Scotland’s Economic Strategy

The top priority of the Scottish Government is to support Scotland’s economic resilience, to protect jobs, investment, and long-term prosperity and growth prospects. Scotland’s Economic Strategy ^[3] sets out the ambition to create a more cohesive and resilient economy that improves the opportunities, life chances and wellbeing of every citizen in Scotland. At the core of the Strategy is the Government’s Purpose, as outlined previously, which is underpinned by two key pillars – increasing competitiveness and tackling inequality.

This is illustrated in Scotland’s economic framework as presented in Figure 1.

Figure 1: Scotland’s Economic Framework

Within Scotland’s Economic Strategy there are four priority areas which the Scottish Government continues to take action across to grow Scotland’s economy, and ensure it remains resilient. The four priority areas are:

• Investing in our people and our infrastructure in a sustainable way;
• Fostering a culture of innovation and research and development;
• Promoting inclusive growth and creating opportunity through a fair and inclusive jobs market and regional cohesion; and
• Promoting Scotland on the international stage to boost our trade and investment, influence and networks.

The four priorities and the policy areas which underpin them, are shown in Figure 2.

Progress across these four priority areas is measured through the National Performance Framework ^[4] that includes 11 outcomes and a range of economic, social, and environmental indicators for Scotland. All 11 outcomes play a role in contributing to moving Scotland towards inclusive growth, and cover major themes of importance to the people of Scotland, including education, health, children, tackling poverty, human rights, and the environment. Outcomes include:

• We have a globally competitive, entrepreneurial, inclusive, and sustainable economy;
• We are open, connected and make a positive contribution internationally; and
• We have thriving and innovative businesses, with quality jobs and fair work for everyone.

Figure 2: Four Priorities

CSR 1: Fiscal Outlook

With the first CSR, the European Commission has placed a focus on actions taken by the UK Government to reduce the budget deficit. Although responsibility for reducing the budget deficit is an issue reserved to the UK Government, the Scottish Government is taking a number of actions in Scotland that will support deficit reduction.

The Scotland Act 2012 granted Scotland limited borrowing powers. These came into effect in April 2015 and were subsequently updated in the Scotland Act 2016. Scottish Ministers have the ability to borrow up to £300 million annually to cover any shortfall between tax forecasts and tax receipts, but crucially not to support general expenditure. In the event of a Scotland-specific economic shock, the annual limit for resource borrowing will double to £600 million. There are also limited capital borrowing powers within an overall cap of £3 billion to borrow up to 15% (or £450 million) annually to support infrastructure investment – an area which remains a priority of Scottish Ministers.

In order to ensure choices are sustainable the Scottish Government has in place a 5% affordability cap, whereby annual revenue commitments will not exceed 5% of the total block grant from HM Treasury. Committed projects plus planned projects and planned borrowing currently peak at 4.3% in 2020-21 and therefore there is headroom within the 5% ceiling.

It should be noted that following the reclassification of Network Rail from a private to public sector organisation, the funding regime will change from 2019‑20 and rail projects will become entirely grant-funded. HM Treasury will take on responsibility for debts accrued by Network Rail in Scotland. In the interests of maintaining comparability current modelling of commitments contain estimates of the Network Rail investment as if it had been RAB (Regulatory Asset Base) funded.

As set out in the budget plans for 2018‑19, the Scottish Government will support infrastructure investment of £4 billion in 2018-19 through a combination of grant, borrowing powers, RAB and revenue financed methods.

To continue to prioritise capital investment the Scottish Government is pursuing a range of innovative financing approaches, including the £3.5 billion non-profit distribution ( NPD) programme (extended in 2014, when a further £1 billion of support for infrastructure investment was announced) which takes the current NPD programme through to 2019-20.

The Scottish Government’s Infrastructure Investment Plan 2015 ^[5] ( IIP), which builds on the achievements delivered through previous infrastructure plans, was published in December 2015. The Plan sets out why there is a need to invest, how the Scottish Government will invest and what strategic, large-scale investments it intends to take forward within each sector over the next 20 years.

The IIP Progress Report, published in April 2018, highlights that significant progress has been made since the publication of the previous progress report in 2017. For example, over the course of last year and up to March 2018, infrastructure projects worth £3 billion opened to the public or completed construction.

Why EU Funding Matters

Funding from the EU supports the implementation of Scottish Government economic policy in a number of important areas. EU funding benefits Scotland significantly, supporting jobs, delivering infrastructure, sustaining rural communities, providing valuable support for the farming and fishing industries and delivering research funding for universities.

EU funding is expected to benefit Scotland by around £5 billion over the current EU budget round (2014-20). European Structural Funds, in particular, play an important part in helping to grow Scotland’s economy in support of sustainable economic growth and the five Europe 2020 targets.

European Structural Funds
In Scotland

• EU Membership has brought significant investment into Scotland since joining the European Union. European Structural Funds have helped build digital networks, roads, harbours and causeways; invested in urban regeneration and business premises; and supported skills and training.
• The benefits are not only monetary; the funds promote partnership working across sectors and Member States for the benefit of those in our communities who need it most.
• The European Regional Development Fund ( ERDF) and the European Social Fund ( ESF), invested €740 million between 2007-2013. This funding supported 96,000 people into work and helped create almost 50,000 jobs.
• Projects supported by EU funding improve transport and internet links to remote regions, boost SME growth, improve education and skills, tackle climate change, and reduce poverty and social exclusion.
• Target groups who will benefit from current EU Structural Funds include those in our communities facing multiple barriers due to poverty and lack of equal opportunity.

Current programmes for 2014-20 are worth over €944 million (£828 million) which together with match funding brings £1.9 billion of investment to Scotland. Over £383 million of funding is now approved under the 2014-20 ESF/ ERDF programmes, providing welcome investment during continued austerity and the uncertainty caused by Brexit.

Areas of focus which support the Scottish Government’s Purpose and all five Europe 2020 targets include:

European Regional Development Fund

European Social Fund

Helping SMEs to innovate and commercialise, supporting the development of new products, processes and services and strengthening links with academic centres Supporting Scotland’s seven cities to create a ‘smart city’ using data to improve services and delivery. It will pilot innovative technology to make Scotland’s cities more energy-efficient, greener places to live and do business Digital connectivity in remote communities (Highlands & Islands only) SME investment support (financial instruments) SME support to grow, including leadership development, access to new markets and use of digital technology Supporting low carbon projects to achieve maturity and scale for external investment Low carbon transport and travel, including integrated ticketing and walking and cycling connections Industrial transition to lower resource intensity, increasing environmental innovation and collaboration between businesses Green infrastructure in urban, deprived areas

Employability (national and local approaches), funding for activity to help unemployed and inactive people into work Youth Employment Initiative ( YEI) funding to increase employment levels for young people in south west Scotland Combating poverty, including through financial inclusion and testing whole-community development Community empowerment and social innovation Social enterprise support Higher-level skills matched to regional industrial needs

As of December 2017, the Scottish Government has committed over £395 million in grant from 2014-20 European Structural Funds programmes to individual projects. These projects, some of which will support inclusive growth and/or improve equity, will:

• Support over 24,000 businesses to start up or grow
• Support 850 low carbon projects
• Create 9,400 new jobs
• Help to grow 150 social enterprises, supporting more than 100 new jobs
• Increase the level and industry relevance of skills for over 34,500 individuals
• Increase the number of people choosing to travel by foot, cycling or public transport by 1.5%
• Support over 5,000 businesses to become more resource efficient
• Help 17,000 unemployed young people access support to get into work or education
• Support over 70,000 individuals with multiple barriers to work into employment or training, or to gain improved qualifications

European Social Fund

The European Social Fund supports inclusive growth through investments in areas such as training, employability skills and financial literacy, and aims to support individuals to get into or progress in work and to combat poverty and social inclusion.

So far £65 million has been awarded to projects to help people with multiple barriers which are preventing them from gaining work, or to increase the opportunities for those in work. These projects aim to support over 25,000 unemployed people into work and 4,000 people in employment.

A number of projects are working with the most disadvantaged individuals and households, seeking to improve their money-management skills, increase their skill levels and find work, and ensure debt is less of a barrier to social inclusion.

The ESF also has a social enterprise and community focus: The Social Economy Growth Fund supports the development and growth of social enterprises; the Social Innovation Fund supports new approaches to tackling poverty and social exclusion, and the Aspiring Communities Fund helps communities develop long-term solutions to reduce poverty

Developing Scotland’s Workforce provides over £25 million to support more than 25,000 participants to gain qualifications through Scotland’s colleges and Skills Development Scotland’s apprenticeship family, including foundation and graduate apprentices.

The youth employment initiative aims to support 16,000 people under 30 in the West of Scotland with the aim of reducing youth unemployment.

Brexit: What’s at stake for Scotland’s Economy?

The Scottish Government published analysis in January 2018 of the implications for Scotland’s economy if the UK exits the European Union. The paper, Scotland’s Place in Europe: People, Jobs and Investment, demonstrates the benefits that Single Market membership has delivered and could deliver in future, and also sets out in detail the adverse economic consequences of a hard Brexit, which will undermine Scotland’s economic prospects, including:

European Single Market and Trade: Brexit threatens Scotland’s access to the single market and international markets negotiated by the EU. The European Single Market is the world’s biggest, most lucrative marketplace which gives Scotland access to 510 million consumers. This could have a significant impact for Scotland

Free Movement of People: Scotland’s economy and society have benefitted enormously from the arrival of EU citizens through the freedom of movement of persons. Key sectors of the Scottish economy are particularly dependent on the contribution of EU citizens. Economic modelling by the Scottish Government found that on average each additional EU citizen working in Scotland contributes a further £34,400 in GDP, and £10,400 in government revenue.* Without immigration, the number of people of working and paying towards public services in Scotland is also likely to fall. Brexit threatens continuation of freedom of movement which is therefore essential for maintaining Scotland’s population growth, which in turn underpins future economic growth and the sustainability of public services.

Missing Future Opportunities: The UK’s departure from the EU means we may not share in the economic gains from future developments in the trade in services and completion of the digital single market. As the European Single Market continues to deepen new opportunities for high-value trade will emerge – particularly in the services sector, the energy sector, and the digital economy. These are sectors of key strategic importance to Scotland’s future prosperity, the loss of such opportunities threatens our ability to deliver sustainable economic growth.

This is why Scotland’s Place in Europe: People Jobs and Investment calls for the UK Government to prioritise the UK’s continued membership of the European Single Market and Customs Union, as it embarks on the negotiations to leave the EU. Short of continuing EU membership, the Scottish Government believes that the best outcome for jobs and living standards is to retain membership of the Single Market and Customs Union – both in transition and permanently.

*Source – Scotland’s Place in Europe: People, Jobs and Investment