Regional economic policy review: paper 1 – the national perspective

1. Introduction

1.1 Purpose

1.1.1 This review examines why, and in which policy areas, economic development works well on a regional scale. We are particularly interested in how the delivery of regional economic development policy can contribute to the aims of the recently published Scotland's National Strategy for Economic Transformation (NSET).

1.1.2 A set of evidence-led and deliverable recommendations will be produced, seeking to strengthen regional economic development delivery in Scotland. These are aimed at longer-term and strategic approaches to national investment and will consider how best Scottish Government can support regional partners to deliver policies and benefits on this scale.

1.1.3 The recommendations are intended to be high level, and allow the Scottish Government to consider options for effective implementation.

1.1.4 But this is not only for Scottish Government; it is vital that regional autonomy is strengthened, with an increase in equally shared responsibility and decision making (thought of as horizontal accountability and integration). The Scottish Government must also enhance the flexibility required for each region to properly respond to their specific economic requirements and support their work to reduce inequality both within and between regions.

1.1.5 NSET and both the 2021/22 and 2022/23 Programme for Government give a refreshed emphasis on regional economic activity, setting the policy context for this review. They reference the benefits of shared ambition, endeavour and purpose in economies of scale, noting how this contributes to the national ambition to transform Scotland's economy. NSET sets out the necessary role for regions within economic transformation the Scottish economy, stating:

"National success cannot leave any region behind. This strategy will not, in detail, outline the critical interventions in each local economy, but we do intend to ensure strong regional economic strategies and local economic development plans covering every area of Scotland to enable this work to progress… It needs to be built from the grassroots, rather than imposed top-down by government."

NSET p31

1.1.6 Recognising regions as key drivers of the economy, both NSET and PfG included the commitment to undertake this review^[1], reinforcing the value of regional working as an effective means of delivering a wellbeing economy, defined as "a society that is thriving across economic, social and environmental dimensions, and that delivers prosperity for all Scotland's people and places"^[2].

1.1.7 Achievement of this is set within the wider context of respecting environmental limits which are embodied by Scottish Government climate and nature targets, and improving the lives and outcomes of children and families, embodied in child poverty targets. Taken together all this ought to reduce regional inequalities.

1.2 Structure

1.2.1 The review is structured across 4 papers:

1.2.2 Paper One: National Perspective: provides an overview of the current delivery landscape. To inform this, we conducted a consultation across Scottish Government and regional stakeholders, seeking responses to a series of questions in order to draw out not only what is currently being done, but identify what is possible, how to enhance regional working, and where additional benefits might be created.

1.2.3 Paper Two: Regional Perspective: presents an overview of regional approaches to economic development across Scotland, offering examples of how different regions are approaching their unique opportunities and challenges. The evidence base for this was compiled largely from work produced by regional partners themselves, looking at Regional Economic Strategies and/or Action Plans and Frameworks, as well as activity around the City Region and Growth Deal Programme.

1.2.4 Paper Three: International Perspective: offers an international comparison, looking at countries who, along with Scotland, have ambitions to create a Wellbeing Economies, including comparable Nordic economies. The paper identifies best practice and policies that may benefit Scotland in taking an intentional approach to building a Wellbeing Economy through regional working.

1.2.5 Paper Four: Recommendations: concludes this Review with a series of recommendations that highlight innovative approaches, supports regional autonomy and suggests how Scottish Government and regional partners can collaborate in creating a Wellbeing Economy.

1.3 Background

1.3.1 It is sensible to take stock of how regional economic policy is being delivered in the current complex economic context. We must also consider what approaches might be taken by Scottish Government to create a positive environment to deliver regional economic success.

1.3.2 To set the scene, it is worth summarising the various commitments to working on a regional basis by the Scottish Government.

1.4 National Strategy for Economic Transformation

1.4.1 The Scottish Government published NSET in March 2022, recognising the opportunities and the challenges facing Scotland and setting out how, over the next ten years, the Scottish Government aims to deliver economic growth to enable greater prosperity, productivity and internationally competitiveness. Scottish Ministers want an economy that benefits the wellbeing of people and the environment.

1.4.2 There are references to regional economic development throughout NSET, but the chapter on Productive Businesses and Regions clearly marks a stronger emphasis from the Scottish Government regarding the role they envisage for regional economies. The strategic work of existing and emerging Regional Economic Partnerships (REPs) and the catalytic investment via City Region and Growth Deals are highlighted as a core contributor to driving the transformation of the Scottish Economy.

"City region and regional growth deals are being delivered across the country through a partnership of national and local government and other regional players including higher and further education, enterprise agencies, and the voluntary and private sectors. These have inspired the development of a growing network of new Regional Economic Partnerships across the country that have an increasingly important role in increasing productivity and driving innovation on a regional basis."

"Scotland's Regional Economic Partnerships bring together key economic actors to enhance regional interests, focus and align resources, sharing knowledge and expertise. This partnership working results in nuanced economic strategies and related action plans that will accelerate economic prosperity."

NSET, p.32 – 34

1.4.3 If regions identify and exploit their economic strengths, leaning into the sectors most associated with their regions and new sectors in which regions have competitive advantage, this will maximise productivity for the region, in turn boosting productivity for the whole of Scotland and opening up inward investment opportunities. To do this it is vital that the regional strategies link to Regional Investment Prospectuses which set out each region's offer to national and international business.

1.4.4 NSET also makes clear the Scottish Government's ambition to reduce regional disparities, both within and between Scotland's regions. This is a strong message in the chapter on Productive Businesses and Regions, which states:

"Scotland has closed the productivity gap with the rest of the UK in recent years, but our productivity performance remains below that of other small advanced economies. Our productivity performance varies across different sectors and there are long-standing regional inequalities with regional differentials in GVA per capita and a range of other indicators of a wellbeing economy including quality of jobs or public services, the health of citizens, the index of multiple deprivation and child poverty. We need to boost productivity across the whole economy."

Going on to note:

"It is vital that every region in Scotland benefits from, and contributes to, a more productive and innovative economy. Every part of Scotland has unique strengths, assets and opportunities and all businesses and communities, rural and urban, can bring innovation and creativity and support the resilience of the economy. This strategy intends to work with businesses, public bodies and citizens in every part of Scotland to ensure that local economic plans reflect the greatest economic opportunities for communities."

NSET p.32

1.4.5 REPAG agrees with the logic behind the principle of linking regional strengths with boosting productivity. It suggests that regional growth can be enhanced by carrying out deep and comparative analyses of the regional structural barriers to growth and investment, mapped against the NSET priorities of Entrepreneurial People and Culture; New Market Opportunities; Productive Businesses and Regions; Skilled Workforce, and; A Fairer and More Equal Society.

1.5 City Region and Growth Deals & Regional Economic Partnerships

1.5.1 The Scottish Government currently supports regional working through investing £1.9 billion in the City Region and Growth Deals Programme and committing to supporting the establishment of Regional Economic Partnerships^[3].

1.5.2 Detail on the City Region and Growth Deal programme, how it functions and what it is delivering can be found in Paper 2. In short, the programme is a long term financial and strategic commitment between the Scottish Government, the UK Government, local authorities, and other regional partners.

1.5.3 Beginning in 2014 with the Glasgow City Region Deal, the programme has expanded so that every local authority is now part of either a City Region Deal or a Growth Deal. Whilst the majority of Deals are delivered at a regional level, this is not the case for all with some being a single local authority e.g., Falkirk, or Argyll & Bute.

1.5.4 As with the Deals Programme, detail on Regional Economic Partnerships (REPs) can be found in Paper 2. To summarise , the background to REPs is embedded in the Enterprise and Skills Review (2017) Phase 2 Report which committed Scottish Government to enabling and encouraging the development of Regional Economic Partnerships across Scotland.

1.5.5 Emerging out of the cross-boundary and multi-organisational governance arrangements for the City Region and Growth Deals, eight REPs have self-assembled throughout Scotland, each focused on establishing a nuanced strategic economic vision for their region.

1.5.6 REPAG are aware of the varied nature of REPs, in part due to differing priorities and levels of maturity. This may also be as a result of a lack of clarity on the expectation from Scottish Government on what a REP might achieve, how they can contribute to national aims, and what the funding implications might be. This review, and Scottish Government's response to it, will show how explicit support from the Scottish Government regarding regional working will strengthen the will of regional partners to identify and take forward transformative strategies of this scale whilst achieving a reduction in regional inequality.

1.6 Place Principle

1.6.1 In 2019, the Scottish Government and COSLA agreed to adopt the 'Place Principle'^[4] to help overcome organisational and sectoral boundaries, to encourage better collaboration and community involvement, and to improve the impact of combined energy, resources and investment.

1.6.2 The principle was developed by partners in the public, private and third sectors and communities, promoting a shared understanding of place, and the need to take a more collaborative approach to a place's services and assets. The principle encourages and enables local flexibility to respond to issues and circumstances in different places.

1.6.3 Whilst a useful tool in terms of policy development, "place" has a different meaning depending on the context and audience, and often refers to local levels. However, the place principle can also apply to larger geographies such as a region, and we see it applied in this way in a number of Scottish Government policy areas that are inherently linked to economic development, e.g. Transport, Planning, Land Use Partnerships, Natural Capital and the link to the National Mission on Child Poverty. These will be explored further in this Paper.

1.7 Political Landscape

1.7.1 Part of the rationale for this review stems from the collective economic impact caused by a complex environment of political, constitutional and policy shifts across the UK, and between the Scottish and UK Governments. The UK's exit from Europe, the introduction of the UK Government's Internal Market Act and implementation of wider Levelling Up Agenda (including their approach to replacing EU Structural Funds) represents a significant change in how the Scottish economy functions, how and where funding decisions are made, and where it is targeted.

1.7.2 Whilst the pandemic has profoundly altered Scotland's economy, The Office for Budgetary Responsibility^[5] predicted that even greater and longer-term damage will be inflicted by Brexit:

"…the strength of the rebound in demand in the UK and internationally has led it to bump up against supply constraints in several markets. In the UK, these supply bottlenecks have been exacerbated by changes in the migration and trading regimes following Brexit. Energy prices have soared, labour shortages have emerged in some occupations, and there have been blockages in some supply chains."

OBR: Overview of the October 2021 Economic and fiscal outlook

1.7.3 Unfortunately we see these predictions realised in the Cost of Living and doing Business Crisis, and NSET recognises that the Scottish Government does not have the fiscal levers to mitigate many of these impacts:

"But with the full powers of an independent country we can, of course, deliver more. At present, macro-economic, fiscal, migration and other levers lie with the UK Government. We cannot ignore that fact when pursuing economic prosperity, nor that even the limited powers we currently have are being steadily eroded through the Internal Market Act. The economic prospectus for an independent Scotland is being prepared ahead of an independence referendum and will set out how those additional powers can be deployed to build greater prosperity over the long term."

NSET, p.4

2020 UK Internal Market Act

1.7.4 Part 6 of the UK Internal Market Act^[6] (January 2021) gives powers to UK Ministers to decide how public money is spent in devolved policy areas spanning culture, sport, education, economic development and infrastructure. This is a fundamental change which undermines a central principle of devolution: the clear split of governmental responsibilities that was established in 1999. The new powers allow the UK Government to bypass devolved decision making, overriding established processes for allocating spending in Scotland.

1.7.5 The Act has enabled the UK Government's Levelling Up Agenda which emphasises reducing regional disparity and uses a suite of funds in an attempt to redress these disparities.

Replacement of EU Structural Investment Funding

1.7.6 The importance of regional disparity was also highlighted during a nationwide consultation conducted jointly by the Scottish Government and the Regional Economic Policy Advisory Group (REPAG), which looked at the replacement of EU structural funding programmes following Brexit (UK Shared Prosperity Fund – UKSPF). The 2020 Bell-Bachtler Report^[7] demonstrated a strong stakeholder preference that UKSPF should enable communities across Scotland to develop and deliver activity that would treat disparity within and between different parts of Scotland.

1.7.7 Noting the potential strategic value in REPs, it was concluded that UKSPF ought to flow through the Scottish Government to REPs to disburse, giving REPs multi-year funding to support the strategic work they lead on.

1.7.8 However, using the Internal Market Act, the UK Government has chosen to issue most funding under the Levelling Up Agenda direct to single Local Authorities. In their UKSPF prospectus, UK Government opted for a loose delivery model allowing for both regional and single local authorities to submit Investment Plans. On a practical level, however, the timescale to submit those plans was too restrictive to allow for regional scale projects to be considered and agreed, resulting in the majority of plans submitted by single Local Authorities. This has undermined rather than strengthened efforts to encourage regional working, though REPAG notes that there is willingness from regional partners to move towards using REPs over time.

1.8 Public Sector Reform

1.8.1 In 2010 a commission to develop a 'road map' for the reform of public service delivery in Scotland was set up. It was anticipated that any recommendations would inform work to reform public service delivery over the subsequent 5-10 years.

1.8.2 The Commission looked at a number of areas, including how public services might achieve positive outcomes for the people of Scotland, the organisational arrangements for delivering effective services, and the values and ethos required to underpin Scotland's public services.

"While public services do not determine the nature of Scottish society, they both reflect the ethical foundations of that society, and help to shape its development."

Christie Report, 2011

1.8.3 The Report^[8] was ambitious, with a number of key elements to support a programme of public service reform and improvement recommended for Scottish Government, local government and other partners and stakeholders to take forward.

1.8.4 Two key objectives of reform were intended to ensure that:

• public services are built around people and communities, their needs, aspirations, capacities and skills, and work to build up their autonomy and resilience; and
• public service organisations work together effectively to achieve outcomes – specifically, by delivering integrated services which help to secure improvements in the quality of life, and the social and economic wellbeing, of the people and communities of Scotland.

1.8.5 There was recognition of the benefits from collaboration on a regional basis; working with national, regional and local organisations was preferable to working independently from one another. The Christie Report placed responsibility for achieving this with Scottish Government, noting that "All relevant public bodies should participate in the preparation of a joint long-term asset management plan under the aegis of each local community planning partnership, based on a shared assessment of the current condition of their assets"^[9].

1.8.6 Ten years on from publication Scotland's Auditor General reviewed the Report's impact^[10], in 2021. Whilst noting that Scotland remains a country of inequalities there was recognition that the Community Empowerment Act^[11] has strengthened community voices in decisions about public services. It's also acknowledged that "the Third Sector can feel like a poor relation to mainstream public services … many community groups still feel that barriers are put in their way to taking part in changing services for the better".

1.8.7 As a result of the consultation^[12] with Scottish Government and regional stakeholders^[13] on current regional working, and ambitions for the future, this review may also help provide a picture of how well regional working is contributing to valuable collaboration as identified by the Christie Report.