Scotland's National Strategy for Economic Transformation: fairer Scotland duty summary

Scotland’s National Strategy for Economic Transformation - Fairer Scotland Duty summary

Title of policy, strategy or programme

Scotland's National Strategy for Economic Transformation

Summary of aims and expected outcomes of strategy, proposal, programme or policy

Our vision for 2032 is for Scotland to be a wellbeing economy, thriving across economic, social and environmental dimensions. Scotland's economy will significantly outperform the last decade, both in terms of economic performance and tackling structural economic inequalities.

We recognise our people must be at the very heart of an economy that offers opportunities for all to succeed and where everybody, in every community and in every region of the country, will share in our economic prosperity. Our ambition is for Scotland to become:

• Fairer: Ensuring that work pays for everyone through better wages and fair work, reducing poverty and improving life chances.
• Wealthier: Driving an increase in productivity by building an internationally competitive economy founded on entrepreneurship and innovation.
• Greener: Demonstrating global leadership in delivering a just transition to a net zero, nature-positive economy and rebuilding natural capital.

The analysis of the evidence has identified the following interconnected Programmes of Action to shift the economic dial and help deliver wellbeing for all:

• Entrepreneurial People and Culture: Establish Scotland as a world-class entrepreneurial nation founded on a culture that encourages, promotes and celebrates entrepreneurial activity in every sector of our economy;
• New Market Opportunities: Strengthen Scotland's position in new markets and industries, generating new, well-paid jobs from the just transition to net zero;
• Productive Businesses and Regions: Make Scotland's businesses, industries, regions and communities and public services more productive and innovative;
• Skilled Workforce: Ensure that people have the skills they need at every stage of life to have rewarding careers and meet the demands of an ever-changing economy and society, and that employers invest in the skilled employees they need to grow their businesses;
• Fairer and More Equal Society: Reorient our economy towards wellbeing and fair work, to deliver the higher rates of employment and wage growth, and to significantly reduce structural poverty, particularly child poverty, and improve health, cultural and social outcomes for disadvantaged families and communities; and
• A Culture of Delivery: Ensure we successfully deliver the interconnected programmes of action set out above and transform the way in which the Government and business listen to, support and work with each other.

Transforming the economy is a national endeavour and government, public sector, business, trade unions, local authorities, third sector and social enterprises, all have a part to play to deliver the bold policy Programmes of Action.

The economy impacts everybody, regardless of their age, ethnicity, sex and other characteristics. The actions identified in NSET are intended to drive Scotland's overall economic prosperity to the benefit of all our people. However, just as every person is an individual with particular characteristics and circumstances, their experiences of economic activity and the impact that Scotland's economy has on their lives are different. Targeting the actions proposed in NSET towards those who experience socio-economic disadvantage, and taking a person-centred approach to considering the outcomes of policies and actions, can help to address entrenched inequalities and cumulative impacts on these groups.

The following disadvantaged groups have been identified as the main focus of consideration for this assessment in terms of the Strategy's implications for them:

• People on low incomes;
• People in unstable employment;
• People who are unemployed, including those who have lost or have not re-entered employment as a result of COVID-19;
• Entrepreneurs, or potential entrepreneurs, from disadvantaged and/or low-wealth backgrounds; and
• People living in areas of multiple deprivation.

The Strategy will be delivered over the course of the next ten years, with regular monitoring of progress and assessment of impact.

Each policy or plan included in the Strategy, will, as it is developed in detail, complete its own Fairer Scotland Duty Assessment to ensure that it considers what more can be done to reduce inequality of outcomes caused by socio-economic disadvantage.

Summary of evidence

The COVID-19 pandemic has exacerbated some pre-existing inequalities (in relation to income, wealth, living standards, labour market participation, health chances and education outcomes) and highlighted the effect of deprivation as a driving force for multiple inequalities and poor outcomes^[1].

People on low incomes and in poverty: It is estimated that in Scotland, 19% of the population (1.03 million people each year) were living in relative poverty^[2] after housing costs in 2017-20 (before housing costs it was 17% or 910,000 people)^[3]. Being in a household where no one is working is one of the biggest risk factors of being in poverty^[4].

In 2017-2020, 650,000 working-age adults^[5] lived in poverty after housing costs (530,000 before housing costs)^[6]. Whilst having paid work is an effective way out of poverty, and families where all adults are in full-time work face a lower poverty risk, having a job is not always enough, in particular if it does not pay well or the hours worked are low. Most working-age adults in poverty live in working households^[7].

While not all people living in deprived areas will be on low incomes, they are more likely to be^[8]. Household finances vary significantly by area deprivation – while 73% of households in the 20% least deprived areas reported that they managed well financially, only 37% did so in the 20% most deprived areas^[9].

During 2017-2020, 240,000 children each year (24% of children) were estimated to be living in relative poverty after housing costs and 210,000 children (21%) before housing costs^[10]. The biggest risk factor for pulling a child into poverty is to live in a household where no one is working^[11]. These households are also at higher risk of deep poverty, which means they are even further below the poverty line^[12]. While the poverty risk is much lower for children in working households compared to those in non-working households, not all work pays enough to lift the households above the poverty threshold^[13]. Households with children of single parents; with three or more children; with disabled household members; of a minority ethnic background^[14]; with a child under age of one; or with a mother aged under 25, are at a particularly high risk of poverty^[15]. Some areas of Scotland may also have a deeper concentration of workless families^[16].

In terms of the impact of COVID-19, it is estimated that low earners were seven times more likely than high earners to have worked in a sector that has shut down as a result of the lockdown^[17].

Labour Market: While labour market headline indicators are relatively strong by historical standards, the impacts of the pandemic are continuing to emerge and evidence suggests that there are unequal impacts, with effects being felt disproportionately for a number of groups, including those in precarious employment and lone parents.^[18]

In September - November 2021, the estimated employment rate^[19] in Scotland was 75.1%, down 0.3 percentage points since pre-pandemic levels in December 2019 - February 2020^[20].

In April 2020 - March 2021, an estimated 25.7% of all people in employment worked part-time, lower than the proportion of employed people working part-time in April 2019 - March 2020 (26.9%), while part-time employment accounted for a higher proportion of women's employment. In the same time period, an estimated 219,100 people aged 16 and over were underemployed^[21], more than in April 2019 - March 2020^[22].

Both people aged 16-24 years and those aged 65 and over were more likely to work part-time (46.5% and 57.2% respectively), while those aged 16-24 were least likely to be in contractually secure employment in April 2020 - March 2021^[23]. Among the 2.4 million UK workers still on furlough in May 2021, workers aged 18-34 years were more likely to have been furloughed from jobs in hospitality and other sectors heavily affected by COVID-19 restrictions than older workers^[24]. The sectors most affected have the highest share of employment of 16-24 year olds, indicating this group has experienced a disproportionate impact.

In Accommodation and Food services, 47.9% people in employment were part-time workers, with 43.0% of people in Wholesale, Retail, and Repair of Vehicles working part time. Almost half of the workforce in Accommodation and Food services (49.6%) were employed in 'low skilled' occupations in 2020, compared with 9.9% of the workforce in the Scottish economy overall^[25]. In 2021, around two thirds of employees (18+) in the Accommodation and Food services in Scotland earned less than the living wage^[26].

Entrepreneurship: Entrepreneurship across the wider business base can drive social mobility, create fulfilling jobs and deliver the economic prosperity necessary to sustain thriving local, and rural communities. This in turn presents economic opportunities across society and a strong role for the state in ensuring wide access to these among diverse groups. Part of this is encouraging entrepreneurship among a more diverse range of social groups.

The NSET Evidence Paper^[27] identified a number of constraints to entrepreneurship in Scotland including a lack of diversity among entrepreneurs; lack of joined up entrepreneurial education from primary through to further and higher education; obtaining finance and finance for growth; skills in how to lead and grown businesses of scale; and business infrastructure, e.g. incubators and other premises.

Impact of the COVID-19 pandemic on socio-economic inequalities: As well as impacts on inequalities, the pandemic has amplified socio-economic disadvantage itself. The impact on low income households has been profound. The poorest groups were already least resilient and many households went into the crisis already financially struggling. Approximately 34% of households in 2016-2018 did not hold enough savings to cover basic living costs for three months, with this figure rising to 55% in the 10% of households with the lowest income^[28]. By June 2020, UK households in the lowest fifth of incomes had seen a more substantial decline than other groups from their pre-COVID earnings, those working in 'shutdown' sectors were already almost twice as likely to be in poverty^[29]. Lower income households in the UK were found twice as likely to have increased their debt during the pandemic compared to higher income households and were 50% less likely to be saving^[30]. Scotland saw a 108% rise in the number of emergency food parcels distributed in July 2020 compared with July 2019^[31], and one in five households in Scotland with dependent children reported that they were "in serious financial difficulty"^[32].

The cost of poverty: The cost of poverty, to our society and economy, is significant. The cost of child poverty in Scotland was estimated to be more than £3 billion in 2021^[33].

Regional inequalities: Whilst many areas of Scotland are performing well, economic wellbeing is not equally distributed across our regions. There are deep seated regional inequalities in economic activity with post-industrial areas performing less well and rural areas facing particular challenges such as a falling labour supply and weaker access to infrastructure.

Creating a fairer and more equal society: A fair and equal society and a wealthier economy are mutually reinforcing^[34]: Economies that have stronger productivity growth also have higher wellbeing and good businesses recognise that well paid and respected workers are productive workers.

Scotland has the opportunity over the next ten years to build a successful economic model ensuring work pays for everyone through better wages and fair work. In this way, and in tandem with other government interventions such as the Scottish Child Payment, we can significantly reduce levels of child poverty and in-work poverty, particularly for women, and eradicate low pay. We can achieve equality of opportunity for all to access and progress in work whilst at the same time mitigating the risk to employment through a just transition to net zero.

The evidence shows that while Scotland (along with Northern Ireland) has the lowest child poverty rate in the UK at 24% (compared to England 30%, Wales 31%)^[35], to meet our statutory 2030 target to have less than 10% of children living in relative poverty around 140,000 children will have to be lifted out of poverty^[36]. In 2021, 14.4% of employees were earning less than the real living wage, although this number has reduced by around a quarter in recent years.

Internal and external modelling of the impacts of policies to tackle child poverty indicated a number of key messages^[37]:

• Radical policies are required to meet the (existing) targets. Employment, wages, and/or benefits need to be significantly increased, beyond incremental changes, even to meet the interim target. This may in turn require policies to generate additional revenue. The final target could well be out of reach with traditional policy levers, requiring more fundamental changes to the structure of the economy.
• Meeting the targets will require a combination of social security and labour market interventions. While it is theoretically possible to meet the interim target through either employment or social security alone, the scale of intervention would either be unrealistic or would generate unintended consequences. There appears to be little scope to achieve further reductions in aggregate poverty rates through housing policy, although it is important that progress on this front is preserved.
• Child poverty in Scotland is significantly affected by policies which are reserved to the UK Government, including minimum wages and working-age benefits. Child poverty will also be shaped by the impacts of COVID-19 and the nature of the economic recovery.

Relationship between productivity and wellbeing: Productivity growth is not an end in itself and raising productivity through unfair work practices does not sit comfortably with the Scottish Government's commitments to Fair Work and a wellbeing economy. When delivered within a policy framework prioritising a broader set of economic, social and environmental outcomes, productivity growth is an important enabler for the Scottish Government aims set out in the Strategy.

The mechanisms through which rising productivity can contribute to delivering Fair Work and a wellbeing economy can be distilled into five main channels: raising household incomes; improving work-life balance; increasing tax revenues and public service provision; a more efficient and fairer allocation and use of resources; and improving the quality of goods and services. This framework demonstrates that boosting productivity and delivering a wellbeing economy are important, interdependent and mutually reinforcing ambitions.

Scottish Government analysis found there is a positive relationship between productivity performance and increasing weekly median pay (excluding overtime). Higher productivity sectors such as Information and Communication and Manufacturing have higher median weekly pay. This contrasts with lower productivity service sectors where median weekly pay is lower than average (not including non-market services – Education and Health & Social care). It demonstrates the important role that productivity performance has on incomes.

The relationship between productivity performance and pay is also evident across countries. In nearly every OECD country where productivity is above the Scottish level, annual average wages are also higher. On average for every 1% increase in productivity, annual wages are around 0.8% higher. If Scotland's productivity matched that of the OECD top quartile, annual wages could be almost £3,850 or 10% higher^[38].

The evidence outlined above suggests that there is inequality of outcomes caused by socio-economic disadvantage across a range of areas including income levels, wealth, labour market participation, health chances and education outcomes. Those experiencing socio-economic disadvantage are more likely to experience inequality and overall poorer outcomes in the labour market, in particular in connection with poorer skills and attainment and in terms of having lower quality, less secure and lower paid work. In formulating the Vision and Ambitions of NSET we have considered carefully what could be done to reduce these inequalities.

Summary of assessment findings

Through NSET we will work towards a fairer and more equal society. To do this, we aim to reorient our economy towards wellbeing and fair work, deliver higher rates of employment and wage growth that will significantly reduce poverty, particularly child poverty, and improve health, cultural and social outcomes for disadvantaged families and communities. We will achieve this aim through a number of Projects, such as:

Tackling Poverty Through Fairer Pay and Conditions, in which we will:

• Apply Fair Work conditionality to grants, requiring payment of real Living Wage, and channels for effective workers' voice;
• Deliver on the commitment to require payment of the real Living Wage in Scottish Government contracts;
• Work with employers and trade unions in sectors where low pay and precarious work can be most prevalent (including leisure and hospitality, and early learning and childcare) to develop sectoral Fair Work agreements that deliver payment of the real living wage, better security of work, and wider fair work first standards. We will also promote the benefits of collective bargaining to achieve higher standards of pay, better security of work and greater union representation; and
• Build on the findings from the Business Purpose Commission Report in Spring 2022, to inform how businesses can deliver positive impacts on prosperity, wellbeing and environmental sustainability.

Eradicating Structural Barriers to Participating in the Labour Market, in which we will:

• Set out how we willsupport parents to increase their incomes from employment as part of cross-government action to deliver upon the ambitious targets set through the Child Poverty (Scotland) Act 2017;
• Simplify the employability system by implementing No One Left Behind;
• Ensure that Every Contact Counts in delivering an aligned and integrated offer of support to those seeking to move towards into or progressing within the labour market;
• Take further steps to remove barriers to employment and career advancement for disabled people, women, those with care experience and people from minority ethnic groups; and
• Build on the principles of the Young Person's Guarantee, developing an all age guarantee of support for those most disadvantaged in the labour market.

NSET recognises that people experiencing socio-economic disadvantage are likely to face barriers to entrepreneurship and in entering and expanding business. The Strategy presents an opportunity to overcome the current social and economic barriers to starting a business and make entrepreneurship an attractive and accessible road to social mobility and economic fairness. We will achieve this through a Programme of Action which will focus on making entrepreneurship more accessible to marginalised groups and the inclusion of entrepreneurship/entrepreneurial considerations in the secondary level education. A number of Projects have been developed to support this, such as:

Embedding first rate entrepreneurial learning across the education and skills systems, in whichwe will:

• Adapt and review Scotland's apprenticeship system so that it is available for start-ups and early scale-ups to use, focussing in particular on providing opportunities for women and other under-represented groups and on specific skills, such as digital.
• Promote the best available project-based entrepreneurial learning across the school and post-16 education curricula. Build a new partnership between business and our education system, offering every school, college and university a network of relationships with high quality start-ups and entrepreneurs providing inspirational role models and mentors who can show young people what can be achieved and develop a culture that celebrates entrepreneurship. This will focus initially on schools in areas of multiple deprivation.

Creating a world-class entrepreneurial infrastructure of institutions and programmes providing a high intensity pathway for high growth companies, in which we will:

• Set targets and focus on providing access to supportive programmes from amongst the most under-represented groups, particularly women, those on low incomes and those without qualifications at further or higher education. This would include the offer of financial support for those who are unable to afford time out from a full-time job or caring responsibilities to develop ideas. An early priority will be to deliver our commitment to review how we support more women into entrepreneurship.

Skills enable people to more effectively participate and progress in the labour market and lead fulfilling lives. Providing people with the opportunities to develop skills, irrespective of who they are and where they live, is key to ensuring everyone has the opportunity to participate fully in the labour market. Our aim is to ensure that people have the skills they need at every stage of life to have rewarding careers and meet the demands of an ever changing economy and society, and that employers invest in the skilled employees they need to grow their businesses. A number of Projects have been developed to support this, such as:

Supporting and incentivising people, and their employers, to invest in skills and training throughout their working lives, in which we will:

• Target more skills investment and support to working age people in poverty or at risk of moving into poverty (particularly the six priority family types^[39]). Ensuring that access to training for more marginalised groups is made as easy as possible, we will work with learners and delivery partners to better understand the steps we must take to improve provision, including in areas such as training at times that suit people with caring responsibilities, with additional support needs or that fit around current jobs.

We aim to transform the way we deliver support to people and businesses across Scotland. To advance the understanding of Equalities and Human Rights issues and embedding them within the policy-making process, we will establish a Centre of Expertise in Equality and Human Rights to work across the Economy portfolio within Scottish Government, as agreed in the Economy Recovery Implementation Plan.

To build on Scotland's leading work on integrating wellbeing into its measurements and policy development and monitor how we are performing as a wellbeing economy, we will publish a Wellbeing Economy Monitor. This will look beyond standard economic indicators such as productivity and employment rates to also incorporate measures such as healthy life expectancy, Fair Work indicators, mental wellbeing, child poverty and greenhouse gas emissions.

We will also publish an annual progress report from the NSET board in order to enhance public accountability. The report will include equalities monitoring.

Sign off

Date: 21 February 2022

Name: Dr Gary Gillespie

Job title: Chief Economist