Scotland's Fiscal Outlook: the Scottish Government's five-year financial strategy

5. Investing in Our Economy

5.1. Support for the economy is key to our efforts to ensure financial stability and maximise the resources available for our public services. Our ambition is to build a modern, dynamic, open economy which benefits everyone in Scotland. The 2017 Programme for Government puts transforming Scotland's economy at the heart of everything this Government does, including the way in which we plan, utilise and allocate our available financial resources.

5.2. In line with this, we have an ambitious programme of infrastructure investment for 2018-19 of more than £4 billion and £20 billion over the life of this Parliament. Our investment strategy is set out in our Infrastructure Investment Plan, with sustainable economic growth through increasing competitiveness and supporting employment opportunities for all included in our guiding principles for investment. We recognise that both economic and social infrastructure help the productive capacity of the economy in both the short term through employment effects, and also in the longer term by improving productivity. We are therefore using all of the levers at our disposal to maximise investment to support economic growth and ensuring that spending is targeted as effectively as possible.

5.3. Capital expenditure in the Scottish Budget in 2018-19 is estimated to support around 22,000 Full Time Equivalent ( FTE) jobs directly. In total, when supply chain and re-spending of wages are taken into account, the entire Scottish capital budget for 2018-19 is estimated to support around 40,000 FTE jobs and contribute £2.3 billion to Scottish GDP.

5.4. When the indirect effects arising from this are considered, this expenditure is estimated to support a further 11,000 FTE jobs through supplier industries in the wider Scottish economy. This means that an additional 6,000 FTE jobs are supported through the 'induced' effects, as a result of the re-spending of wages.

Supporting business growth through business rates

5.5. The non-domestic rates system has a key role to play in delivering sustainable economic growth through the direct impact on the operating costs of businesses and on the totality of resources available to fund public services. The Barclay Review of non-domestic rates was established to deliver a rates system designed to better support business growth, long-term investment and reflect changing market places. The subsequent recommendations include measures to support growth, to improve administration of the system and to increase fairness.

5.6. While responding to the Barclay Review, the Scottish Budget delivered the most attractive package of non-domestic rates in the UK. The Budget delivered the number one ask of Scottish businesses by capping the business rates uplift at the consumer price index ( CPI) rather than the retail price index ( RPI). It supported the most competitive reliefs package in the UK, worth a record £720 million, up from £660 million in 2017-18, and maintained the Small Business Bonus Scheme with the maximum savings achievable through the scheme increasing to £7,200.

5.7. Having been introduced in April 2018, the Business Growth Accelerator will encourage new business investment by temporarily suspending rates liabilities and the Day Nurseries relief will reduce the overheads to nursery providers who have such an important role to play in ensuring our children have the best start in life. These recommendations were delivered as quickly as possible following the Programme for Government and are unique across the UK.

5.8. Scotland's Economic Strategy ^[11] sets out an overarching framework for how we aim to achieve a more productive, more cohesive and fairer Scotland. Our Economic Strategy has made clear that the questions of tackling inequality and securing economic growth are not mutually exclusive. That is why inclusive growth is central to our Economic Strategy – it aims to increase productivity and reduce inequality through fostering innovation, increasing investment and promoting internationalisation.

5.9. Scotland's economy continues to show resilience but it faces challenges of demographic change, technological advances and preparing our workforce for the jobs of the future. The UK's exit from the EU continues to provide serious economic headwinds and our economy continues to show the impacts of years of austerity. But we know we can and must do more to secure growth for everyone in Scotland, no matter their background or where they live.

Fair Work and pay

5.10. In creating the conditions for a more productive, more cohesive and fairer Scotland, the Scottish Government is doing everything it can to promote fair working practices.

5.11. The past 30 years have seen a marked narrowing of the priorities of many private sector companies. An increasing emphasis on short-term profit and shareholder return has promoted a business model which rewards the minimisation of labour costs. This situation has led to the imbalance in shared benefit of enterprise, and some unwelcome developments such as greater job insecurity, poor contracting through the inappropriate use of zero-hours contracts, underemployment and poverty pay – all of which reinforce cycles of inequality.

5.12. Despite the challenge of employment law being reserved to the UK Government, the Scottish Government is determined to take action to improve these working practices and promote, champion and to support a Fair Work approach.

5.13. Fair Work sits at the intersection between economic and social policy and is central to the Scottish Government's twin goals of boosting competitiveness and tackling inequality. Increasing the quality of jobs has wider social benefits beyond productivity and tax.

5.14. Fair Work has demonstrable benefits to:

• health;
• skills development;
• reducing inequalities; and
• can support greater innovation in our businesses.

5.15. As a Government we are at the forefront of the promotion of Fair Work through measures including the promotion of the Living Wage, the creation of the Fair Work Convention, our approach to procurement, and the delivery of the Business Pledge.

5.16. As a key part of driving forward Fair Work and promoting fair working practices, the Scottish Government is actively championing the real Living Wage to help ensure that people's basic pay meets the cost of living. We have achieved our target of reaching 1,000 accredited employers by autumn 2017, are the first Government of the home nations to be Living Wage accredited and are actively promoting the payment of the 'real' Living Wage to those working on government contracts. All these actions help ensure that, at 81.6 per cent, Scotland has the highest rate of workers in the UK earning the real Living Wage.

Growing our economy

5.17. Beyond creating the conditions for Fair Work, we want Scotland to be the best place to do business in the UK and Europe. To do that we need to ease the cost of doing business, provide high quality transport and digital infrastructure, attract talent, create opportunity for exports, trade and investment, drive ambition and make sure that ambitious businesses can get the help they need to overcome their barriers to growth.

5.18. That is why the Programme for Government articulated the Scottish Government's vision for Scotland to be an inventor and producer of the goods, industries and skills of the future, not just a consumer. Scotland has a competitive advantage in the emerging technologies and innovations that will both drive future growth and deliver our low carbon future. We have also established strengths in key sectors like renewable energy, creative industries, life sciences, tourism, food and drink and advanced manufacturing – we intend to build on these strengths. We are now delivering that vision and will build on this theme in future years.

5.19. Critical to this vision is the Scottish Government's commitment to build and invest in Scotland's infrastructure. The recent Scottish Budget delivered major investments that underpin our focus on innovation, infrastructure and investment, internationalisation and inclusive growth. These include:

• Developing our cities and regions, reducing costs and making Scotland an attractive place to do business:
  • committing over £1 billion over the next 10-20 years to support City Region Deals for Glasgow, Aberdeen, Inverness, Edinburgh and South-East Scotland, with planned action to secure new deals for Stirling, Clackmannanshire and the Tay Cities;
  • £96 million to deliver the most attractive business rates package in the UK with the increase to the rates poundage capped at CPI inflation; and
  • a 64 per cent increase of £270 million in the Economy, Jobs and Fair Work budget, forming part of a total investment of £2.4 billion in our enterprise and skills bodies.
• Supporting innovation and commercialisation of research through:
  • a 70 per cent increase in investment in business Research and Development; and
  • £18 million as part of a £65 million package of investment for the National Manufacturing Institute to make Scotland a global leader in advanced manufacturing.
• Providing world class infrastructure and building low carbon innovation through:
  • supporting every home and business across Scotland to have access to superfast broadband by 2021 through the procurement of the R100 programme;
  • investing £1.2 billion in our transport infrastructure, including key road projects and further electrification of the rail network;
  • the Low Carbon Infrastructure Transition Programme, which is co-funded by the European Regional Development Fund ( ERDF) and is expected to fund large scale projects which support the ambitions of Scotland's Energy Strategy, which was published in December 2017. This, coupled with a new £60 million fund to support innovative energy projects, will keep Scotland at the forefront of low carbon innovation; and
  • investing almost £40 million to provide electric vehicle charging infrastructure, with concentrated action to support and encourage the take-up of electric vehicles in cities and towns to contribute essential action towards our target to phase out the need for new petrol and diesel cars and vans by 2032.
• Improving the financial investment landscape in Scotland by creating a programme of additional economic investment of almost £0.5 billion over the next three years, by:
  • setting aside resources of £340 million to provide initial capitalisation for the Scottish National Investment Bank; and
  • creating a new £150 million Building Scotland Fund announced by the Scottish Government in December 2017.

5.20. Providing the right environment to encourage and support investment in Scotland is a fundamental building block for growing the Scottish economy. That is why the creation of the new Scottish National Investment Bank is so important. As an innovative, commercial enterprise which will provide a new supply of capital to boost investment in the Scottish economy, this is expected to encourage the leverage of additional private investment and will drive forward new investment in Scotland.

5.21. The publicly owned Scottish National Investment Bank will become a cornerstone of the economy that we want to create in Scotland. It has the potential to be transformative and will operate under a core set of principles and missions. It will support sustainable growth and bring benefits to individuals and communities across the country, in the process making Scotland a fairer and more prosperous country.

5.22. This represents a significant new development in helping to build the economy of Scotland, and the Scottish Government is committed to investing £2 billion over ten years to support this venture to capitalise the Bank, to provide a significant boost to the supply of capital stimulating the Scottish economy.

5.23. Beyond providing the environment to encourage and support major infrastructure investment, we are taking strides to reform our business environment in order to underpin long-term economic growth. We will do this primarily through building on the successes and transforming the impact of our enterprise and skills agencies. The Scottish Government has established a new Strategic Board to maximise the impact of the collective investment made in enterprise and skills development and to create the conditions for delivering inclusive growth.

5.24. We need to take action at all levels to build and grow the economy, which is why the Scottish Government has committed to creating a new enterprise agency in the South of Scotland, with an interim Economic Partnership in place, backed with an investment of £10 million.

5.25. In light of the UK's exit from the EU and an uncertain European landscape, it is especially important to build collaborations and networks to encourage future European and worldwide investment. To that end, the Scottish Government is boosting Scotland's trade, export and international profile through establishing a Board of Trade to support the delivery of our Trade and Investment Strategy; is establishing new hubs in Berlin and Paris to help ambitious Scottish companies take advantage of business opportunities across Europe; and is strengthening our existing presence in Brussels and Canada.

Economic performance

5.26. As our economic approach builds momentum, we are seeing Scotland lead the way on many economic indicators:

• Scotland has secured more Foreign Direct Investment projects than any other part of the UK outside London;
• Scotland has seen the fastest productivity growth in the UK since 2007;
• Scotland's international goods exports (including oil and gas) increased by 19 per cent to £28.8 billion between 2016 and 2017 – the fastest growth of any of the UK nations;
• Scotland has outperformed the UK in terms of R&D spending growth – over the latest year and since 2007;
• Scotland has the highest proportion of employees paid at least the Living Wage of all UK nations – at 81.6 per cent; and
• Scotland outperforms the UK on female and youth employment, unemployment and inactivity rates.

5.27. Scotland's economic performance has been resilient in 2017 despite challenging economic conditions that continue to be dominated by heightened uncertainty as the UK moves closer to leaving the EU. With four consecutive quarters of growth in 2017, Scotland's economy grew 0.8 per cent overall in 2017, rising from 0.2 per cent growth in 2016. While the pace of growth remains below its long run trend rate, the strengthening over the year was driven 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.

5.28. Scotland's labour market is strong – over the past year unemployment and inactivity have fallen, while employment has risen. The latest data for January to March 2018 show that unemployment fell to 4.3 per cent, while the number of people in employment rose to 2.63 million. This is up by 10,000 over the past year and 66,000 more than the pre-recession peak in 2008.

Economic outlook for the next five years

5.29. Over the next couple of years, a number of independent forecasters present a slightly stronger outlook for economic growth. However, the pace of growth is expected to remain below its historic trend. Independent forecasts for the Scottish economy suggest that GDP will grow by between 0.7 per cent and 1.4 per cent in 2018 and that growth will increase in 2019. ^[12] The improved outlook relative to 2017 reflects a stronger world economy and more optimism for oil and gas and related production activities.

5.30. There are signals from some business surveys that, while business optimism has improved over the past year, business investment intentions are fragile and Scottish consumer sentiment remains weak. This period of heightened uncertainty as a result of the UK's exit from the EU is identified as a key factor affecting the economic outlook by all independent forecasters.

5.31. The Scottish Fiscal Commission produces official forecasts of the Scottish economy over a five year time horizon and its latest forecasts are published alongside this document.

5.32. The Scottish Fiscal Commission's economic forecasts in turn feed into its fiscal forecasts. Forecasts of employment and wage growth are key drivers of the economic and income tax forecasts. Other factors such as demography, migration, productivity and trade in the coming years are also key to determining the forecasts.

5.33. Table 5.1 sets out the latest headline economic forecasts by the Scottish Fiscal Commission ( SFC).

Table 5.1 – Headline economic forecasts (calendar year basis)

	2017 (outturn)	2018	2019	2020	2021	2022	2023
GDP (per cent growth)	0.8%	0.7%	0.8%	0.9%	0.9%	0.9%	0.9%
Employment (millions)	2.64	2.65	2.65	2.65	2.66	2.66	2.66
Earnings (per cent growth)	1.1%	1.6%	1.9%	2.2%	2.6%	2.9%	3.2%

5.34. The SFC's latest forecasts continue to suggest that economic growth will be lower in Scotland than the UK as a whole over the next five years. This reflects their judgement that productivity growth will be weaker in Scotland over the period, as well as an expectation that the working age population will grow more slowly in Scotland.

5.35. The SFC's report highlights that:

• the UK's exit from the EU will impact negatively on Scotland's economy and reduce migration, productivity and trade in the coming years;
• in comparison with Office for Budget Responsibility ( OBR) forecasts: while there is a gap in total GDP growth between the SFC and OBR forecasts, it is much narrower for GDP per head; and
• by 2022 GDP per capita is forecast to grow by 1.0 per cent a year in the UK ( OBR) and 0.7 per cent in Scotland ( SFC).

Longer-term economic outlook

5.36. Over the long term, Scotland's economy faces significant challenges from demographic change and the UK's exit from the EU but there are also opportunities associated with transition to the low carbon economy, digitalisation and technological advances and preparing our workforce for the jobs of the future.

5.37. The world economy is changing at a dramatic pace. The successful economies of the future will be resource efficient and low carbon, and they will harness the power of technology. The opportunities for those that adapt and lead these changes are substantial. The Programme for Government 2017 sets out actions to make Scotland a country that will lead change and reap the economic rewards it will bring.

5.38. The Scottish Government recognises the importance of emerging technologies in Scotland, such as automation, and its role in shaping our future prosperity. Scotland has a highly skilled workforce and we will continue to support and develop it in line with modern advances in technology. We can capitalise on changes in global forces, focusing on safeguarding and developing future jobs by preparing a workforce that can adapt and respond effectively to these changes. We share a common objective with the Scottish Trades Union Congress ( STUC) – to ensure automation and digitalisation have positive outcomes for all of Scotland's people. Taking this action now to harness the potential of technological change is vital to building a modern, successful and dynamic economy.

5.39. The Scottish Government will continue to place the transformation of Scotland's economy at the heart of everything we do, and through our Economic Strategy we will achieve a more productive, cohesive and fairer Scotland. Building and growing our economy will in turn provide increased tax revenues for Scotland, which will be used to support and enhance the range of public services that we provide.