Europe 2020: Scottish national reform programme 2017

Chapter 2: Supporting Recovery & Delivering Sustainable Economic Growth

The Scottish economy remained resilient in 2016, in the face of ongoing external challenges and heightened levels of uncertainty following the EU referendum in June.

Scotland's economy grew 0.4% in 2016, and at the end of the year Scotland's GDP per head was 1.8% above its pre-recession level.

Scotland's labour market has also remained resilient with latest data for December to February 2017 showing that the unemployment rate fell below that of the UK to 4.5% and Scotland's youth and female employment rates continued to outperform the UK average.

However, challenges facing the oil and gas industry and its supply chain from the low oil price continued in 2016, which alongside further slowing in the construction sector, and weakness in global growth, continued to weigh on growth in the Scottish economy.

The UK vote to leave the EU and the prospect of commencing exit negotiations in 2017 has been a source of significant uncertainty to the UK and Scottish economy. The fall in the value of Sterling has been the most visible impact on the economy to date, helping to boost export orders whilst contributing to the reintroduction of inflationary pressures.

Survey evidence signalled that business and consumer sentiment were impacted by the changing economic and political climate following the EU referendum. Whilst business optimism rebounded at the end of 2016, consumer sentiment remained negative in the second half of the year.

The economic outlook for Scotland is positive, however it is weaker on the back of the EU referendum with expectations that uncertainty and rising inflation will weigh on business and consumer activity. The Scottish Government forecast growth of 1% for Scotland in 2016-17 and 1.3% in 2017-18.

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 Scottish Government's top priority is to support Scotland's economic resilience, to protect jobs, investment and long-term prosperity and growth prospects. Scotland's Economic Strategy ^[4] was launched in March 2015 and 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 to create a more successful country, with opportunities for all of Scotland to flourish, through increasing sustainable economic growth.

The approach of Scotland's Economic Strategy is based on two key pillars; increasing competitiveness and tackling inequality. Scotland's economic framework is presented in Figure 1.

Figure 1: Scotland's Economic Framework

Within Scotland's Economic Strategy there are four priority areas under which the Scottish Government are taking a number of actions 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 priority areas and the policy areas which underpin them are set out in Figure 2.

Progress across these four priority areas is measured through the National Performance Framework ( NPF) which includes a range of economic, social and environmental indicators and targets for Scotland. The NPF is being refreshed with the National Outcomes currently being consulted on and reviewed with the aim to develop a new set of National Outcomes for Scotland. The refreshed NPF will continue to be used to assess progress across the four priority areas.

Figure 2: Four Priorities

Increasing Sustainable Economic Growth

Scotland's Economic Strategy provides a framework to support sustainable economic growth in Scotland, with opportunities for all to flourish. This is reflected in the Scottish Government's current programme ^[5] , which focuses on:

• Making Scotland's education system world class with equal opportunities for all
• Growing a productive, sustainable economy with more jobs and fair work
• Transforming public services
• Empowering local communities and strengthening local democracy
• Scotland's place in the world

A range of actions are being taken forward against these priorities. However, in the remainder of this chapter we focus on actions being pursued in Scotland to support investment-led economic growth and boost the supply of housing, which cover two of the areas highlighted to the UK Government through its CSRs.

CSR 1: Fiscal Outlook

As part of the CSRs to the UK, the European Commission has placed a focus on actions taken by the Governments to reduce the deficit. Although the responsibility of reducing the budget deficit is a reserved issue to the UK Government, the Scottish Government is taking a number of actions that will support deficit reduction.

Under the Scotland Act 2012, Scotland gained limited borrowing powers which came into effect in April 2015 (subsequently updated in the Scotland Act 2016). Scottish Ministers are now allowed 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 increase 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, which remains a priority of Scottish Ministers.

The Scottish Government takes a prudent approach to investment. We would expect to limit our future revenue funding of long-term investment to a maximum of 5 per cent of our expected future annual total Departmental Expenditure Limit ( DEL) budget (which contains both the Scottish Government's capital and revenue budgets). The Draft Budget 2017-18 reaffirms our commitment to ensure that we use revenue-funded methods of investment at a sustainable level, and to not overly constrain our choices in future years.

As set out in the budget plans for 2017‑18, the Scottish Government will support infrastructure investment of £4 billion in 2017-18 through the traditional capital budget, new borrowing powers, the Non Profit Distributing ( NPD) pipeline, rail investment through Network Rail's Regulatory Asset Base ( RAB) and capital receipts.

To continue to prioritise capital investment the Scottish Government is pursuing a range of innovative financing approaches, including the £3.5 billion 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 ( IIP ^[6] ) which builds on the achievements delivered through previous infrastructure plans was published on 16 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 March 2016 highlights that significant progress has been made since the publication of the previous Plan in December 2011. For example, during 2015, projects totalling over £1.5 billion completed construction and are now operational. Projects include those listed on page 16.

CSR 2: Investment in Housing

The Commission's CSRs to the UK recommend that further steps are taken to boost the supply in the housing sector, including by implementing the reforms of the UK's national planning policy framework.

This is an area where the Scottish Government and its partners are already taking a range of actions to ensure that all people in Scotland live in high-quality, sustainable homes that they can afford and that meet their needs.

The Scottish Government's housing strategy, Homes Fit for the 21st Century ^[7] aimed to provide at least 30,000 affordable homes over 2011-16, including 20,000 homes for social rent of which at least 5,000 would be Local Authority homes. This target was exceeded, with a total of 33,490 affordable homes being delivered by end March 2016. This included 22,523 homes for social rent and within that, 5,992 Local Authority homes. Scottish Ministers have announced a target over 2016-21 to deliver at least 50,000 affordable homes, including 35,000 homes for social rent. This ambitious plan has been backed up with investment of at least £3 billion.

The Scottish Government announced an increase in housing subsidies by up to £14,000 for social and affordable homes for rent being delivered by councils and Registered Social Landlords, to help towards the target of delivering at least 50,000 affordable homes by the end of the next Parliament.

A range of schemes support private sector housing activity, including the £195 million Affordable New Build and Smaller Developers Help to Buy (Scotland) shared equity schemes, which offers support to homebuyers from 2016-19.

These schemes offer equity support of up to 15 per cent on more affordable new build homes, with progressively reduced threshold prices targeting support to those most needing assistance to buy a home and adapting to improved market lending conditions. The new schemes build on the popularity of the previous Help to Buy (Scotland) scheme which assisted 8,000 homes to be purchased with funding of over £305 million and helped stimulate the home building industry with a total sales value of over £1.4 billion.

In addition, the Open Market Shared Equity Scheme ( OMSE) continues to assist first time buyers on low to moderate incomes and priority access groups to purchase a property on the open market by offering equity support of between 10-40%. OMSE is part of the Scottish Government's commitment to deliver 50,000 affordable homes by 2021.

Financial Innovation

The Scottish Government is maintaining Scotland's leadership in financial innovation and continuing to work creatively with its partners and use innovative ways to deliver more for less public investment - the contribution from innovative financing approaches using government guarantees, loans, grant recycling and new sources of private funding is substantial and growing.

Approaching 5,000 new affordable homes have been approved through a range of innovative financing mechanisms - unlocking c. £650 million of housing investment in addition to conventional funding routes.

The Local Affordable Rented Housing Trust ( LAR) is a pioneering affordable housing model that will deliver 1,000 homes for mid-market rent ( MMR) offering tenants high quality, affordable homes across Scotland. LAR is supported by a £55 million Scottish Government loan to be matched by private investment, lifting overall funding to more than £100 million.

The MMR Invitation, launched in February 2016, seeks proposals that can deliver affordable MMR homes at scale by 2021, backed by Scottish Government financial support and attracting significant private investment. The window for MMR invitations is now closed and we are carrying out a robust assessment of proposals.

The SG has supported pension fund investors, delivery partners and local authorities to work together to boost the supply of affordable housing - Falkirk Local Government Pension Scheme Fund has invested £30 million into affordable housing across Scotland, supplemented with Scottish Government grant assistance.

The Scottish Government invested a further £32 million in Charitable Bonds - an ethical investment instrument - in 2016-17 and the total investments of £70 million across 12 Bonds by April 2017 (supporting housing associations in providing 935 new affordable homes across Scotland) will have generated charitable donations - for the construction of new social housing - of over £17 million.

Scotland's Planning System

Scotland's 2016 NRP reported on the independent review of the planning system. The report of the independent panel was published on 31 May 2016. Scottish Ministers subsequently issued their response to the panel's report in July 2016. The response welcomed the work of the panel and set out a programme of work to explore their 48 recommendations in more detail. This has culminated in the publication of "Places, People and Planning - a consultation on the future of the Scottish planning system" on 10 January 2017. The paper sets out 20 proposals for improving planning in Scotland, and is open for consultation until 4 April 2017. Key proposals aim to streamline development planning, strengthen community engagement, support the delivery of homes and infrastructure and improve resourcing of the planning system. A Planning Bill is currently expected in late 2017.

During 2015, infrastructure projects totalling over £1.5 billion completed construction and are now operational. These include:

Education

• Scotland's Schools for the Future - Garrowhill Primary School, Glasgow City Council (£12.1 million)
• Inverness Campus (£23.5 million)
• Inverness College (£52.2 million)
• St Ronan's Primary School, West Dunbartonshire (£2.2 million)
• Lennox Primary School, West Dunbartonshire (£3.4 million)
• Lairdsland Primary School, East Dunbartonshire (£7.3 million)
• Brimmond Primary School, Aberdeen City (£12.4 million)
• Ellon Academy, Aberdeenshire (£35.4 million)
• Alford Academy, Aberdeenshire (£26.1 million)

Health

• The Queen Elizabeth University Hospital and Royal Hospital for Children, Glasgow (£842 million)
• Primary Care Health Centres at East Kilbride, Kilsyth, Wishaw, Harris and Scalloway (£56.2 million)

Transport

• Borders Rail (£353 million)
• Ullapool to Stornoway Ferry (£41.8 million)

Updated April 2017