Scotland's National Strategy for Economic Transformation

1. Our Future Economy

The ambition of this strategy is not just to grow our economy but, in doing so, to transform our country's economic model so that we build an economy that celebrates success in terms of economic growth, environmental sustainability, quality of life and equality of opportunity and reward.

1.1 Our Vision

By 2032 Scotland's economy will significantly outperform the last decade, both in terms of economic performance and tackling structural economic inequalities. Our people will be at the very heart of an economy that offers opportunities for all to succeed and where everybody, in every community and region of the country, will share in our economic prosperity.

Internationally, we will be recognised as a nation of entrepreneurs and innovators, who will have embraced the opportunities of new technologies. We will have boosted productivity considerably and focused resources on opportunities that will transform our economy and our society. We will be a nation confident of our place in the world, attracting international investment in research and innovation, in the industries of the future, and an exemplar of a just transition to net zero.

Scotland will be recognised at home and throughout the world as:

• an international benchmark for how an economy can transform itself, de-carbonise and rebuild natural capital whilst creating more, well-paid and secure jobs and developing new markets based on renewable sources of energy and low carbon technology;
• a great place to live and work with high living standards, and a vibrant, diverse culture in which all sectors of the economy work to eliminate the scourge of poverty;
• the best place to start and to grow a business or social enterprise;
• a leader in its chosen areas of research and development, collaborating with other centres of excellence across the world and using these strengths to stimulate business opportunities;
• a country where economic power and opportunity are distributed fairly across our regions, cities and towns, rural and island communities;
• a magnet for inward investment and global private capital;
• an outward-looking nation, engaging internationally, exerting a meaningful influence on the policies, trends and events that shape our world; and
• a nation where people can continually upgrade their skills and help shape their workplaces to navigate a changing economy, and where employers have the supply of skills they need, and fully utilise these to grow and take advantage of opportunities.

As a consequence of the actions set out in this strategy, we will have achieved our vision of building a wellbeing economy (see Figure 1).

1.2 Our Commitment

We can only succeed and achieve our goals if we pull together as the nation of Scotland. This economic strategy calls for a national endeavour, drawing on the talents, resources and commitment of every citizen. The benefits of our success will be shared, and so must be the actions we undertake to deliver that success. We will draw on the strengths of people and organisations from all sectors of the economy in what is commonly described as a "Team Scotland" approach.

At a time of unprecedented change, our commitment as a government is to provide clear leadership and direction to pursue economic growth and prosperity, ensuring that Scotland has the infrastructure, resources, skills and talent to respond quickly and seize the opportunities before us.

In doing so, we recognise that the Government must continue to play a direct role in the economy, taking an entrepreneurial approach itself to drive forward innovation across the economy and to ensure more of the nation's wealth and services are managed for the collective good.

We are not blind to the immediate and long-term structural challenges facing the Scottish economy, and this strategy is upfront in grappling with these. Neither do we ignore Scotland's fundamental economic strengths which we must build on. We pledge to listen and respond to calls that are made on government, but in return we ask business to join us in relentlessly pursuing the strategy's ambition for a fairer, wealthier and greener country.

We recognise that it is our citizens who will actively transform the economy through work, innovation, and investment. As such, we are committed to working in partnership with these many individuals and organisations – business founders and leaders, trade unions and workers, local authorities, institutes of education and research and many others.

Achieving the economic prosperity we want also requires accountability. To ensure that the actions described in the strategy are taken, we will establish a robust governance structure co-led by business, with immediate access to Scottish Ministers, that will hold the public sector and the business sector directly to account for delivery of this strategy. As a first step, delivery plans will be finalised for each of the new programmes of action, within six months of the publication of this strategy.

New initiatives identified in this strategy do not mean that we are abandoning actions or initiatives that have proven to work. We will "double down" on the things that are shown to work. The strategy is aligned with our National Performance Framework, with existing plans targeted at specific aspects of our economy (see Figure 2) and regional and sectoral strategies. Whilst we will challenge the progress and efficiency of each of these plans there will be no letting up in our commitment to achieve them.

1.3 Immediate Challenges

We recognise that this strategy is being published at a time when many households and businesses are still focused on survival rather than long-term planning and that life is precarious for many low-income families. We are still living through a pandemic and we acknowledge that it has both exacerbated existing inequalities and heightened awareness of the need to protect those at risk in society.

The pandemic has also highlighted underlying weaknesses in parts of our economy and exacerbated change in others – such as retail. Customer-facing sectors of the economy, such as hospitality, tourism and the culture sector, have been most affected by Covid restrictions. Although Scotland's economic output returned to pre-pandemic levels in November 2021, the pandemic has fundamentally altered our economy and society. However, over the longer term, according to the Office for Budget Responsibility,^[2] Brexit will inflict greater damage on the economy than even the pandemic. This is becoming increasingly apparent given the current challenges in meeting our skills and workforce requirements.

In our view these challenges make this the very time to demonstrate leadership and set out a long term approach to our economy. That means, as well as delivering growth, we take on the big challenges of structural inequality, the transition to net zero, and securing a green recovery from Covid.

1.4 Long-Term Structural Challenges

Some of Scotland's economic challenges precede the impact of the pandemic. Our population is ageing and around one in five of Scotland's working age population is economically inactive.^[3]

Despite our wealth, too many households continue to live in poverty as a result of structural inequalities. Healthy life expectancy is too low in the most deprived areas of our country. Tackling the underlying causes of inequality in our society and providing economic opportunity is vital in order to improve life chances.

Scotland's productivity lags behind that of many other advanced economies and whilst we continue to innovate too few of our ideas are turned into businesses and too few of our new businesses are scaling up successfully. For example, as a share of Scotland's businesses with more than 10 employees, high-growth enterprises account for 3.9% – lower than the comparable figure of 4.5% for the UK as a whole.

And yet if we address poverty this will in turn boost productivity. If Scotland's productivity matched that of the OECD top quartile, average annual wages would be almost 10% higher.

Whilst many parts of Scotland are performing well, there are deep-seated regional inequalities, with post-industrial areas performing less well and rural and island areas facing particular challenges such as a falling labour supply, poorer access to infrastructure and housing challenges which are holding back local businesses.

The transition to a net zero economy presents Scotland with the further challenge of achieving a just transition that delivers positive employment, revenue and community benefits, in contrast to the industrial transitions of the 1980s.

Our ability to address these long-term structural challenges is made more difficult by a lack of economic powers. For example, our ability to directly effect change in the labour market is limited as long as employment law remains reserved. And without migration powers we cannot design and implement an immigration system to address our demographic challenges.

1.5 Investing in Our Strengths

Despite these short-term and long-term challenges, Scotland has enviable strengths. We perform well internationally on a number of important indicators of economic performance. We have more top universities per head of population than any country in the world and a quarter of Europe's offshore renewable energy potential. Scotland is in the top quartile of OECD countries for higher education R&D, the percentage of the population with tertiary education and young people's participation in the labour market.

Scotland has a proud history as a trading nation and is an increasingly connected, global economy. We start from a strong position in the innovative technologies that underpin the industries of the future and produce high-quality products and services, such as our food and drink, our creative industries and our major events and tourism offer, that are in demand across the world.

Being bold and transformational isn't just about new industries and markets, it's about backing our greatest assets and existing industries, supporting them to improve, to be more productive and creative, to transition to net zero and to be more resilient to economic shocks in ways that ensure that we, as a country, maximise the opportunities for more, better paid and fairer employment that lifts living standards.

1.6 Embracing New Opportunities

This strategy aims to maximise our economic strengths, tackle our weaknesses and build a wellbeing economy (see Box A). It does so by identifying the greatest economic opportunities for Scotland over the next decade, the most obvious of which is the just transition to a net zero economy.

A just transition must focus on protecting jobs and diversifying our economy whilst contributing significantly to sustainable growth and meeting our net zero commitments and can also make a meaningful contribution to reducing child poverty. In other words, it should create new jobs, businesses and open up markets in new sectors as well as supporting the transition of existing sectors, in a way that has fairness and equality built in. Restoring nature and investing in our natural capital and land-based economy will support Scotland's role in tackling the climate and nature crises, while also creating new opportunities for nature-based businesses and jobs, spreading the benefits of a just transition to our rural and island economies.

Scotland's statutory target of achieving net zero by 2045 provides the ambition to drive action and innovation. Sectors like financial and legal services, food and drink, manufacturing, energy, creative industries, major events and tourism have the international reputation, expertise and opportunity to reap the benefits of a just transition, through a combination of early action and investment.

For industries like oil and gas, which will continue to be part of the energy mix while we transition to net zero, diversification using the expertise and skills built up over decades presents an opportunity of enormous significance. We are already seeing the benefits in the development of Scotland's offshore wind sector. While this transition will need to be managed carefully, by acting early, and by being leaders not followers, we can maximise the benefit of the transition for Scotland and develop industries and skills that can be exported around the world. It is by embracing these new opportunities that we will deliver economic prosperity.

Our ability to maximise our economic prosperity is constrained by Scotland's current constitutional position in which macro-economic, employment, energy and the majority of revenue raising powers are reserved to the UK Government. For example at a very practical level, the expansion of our energy sector is constrained by the energy regulator's decisions on charges for access to the power grid that disadvantage Scotland's energy producing areas. This strategy therefore focuses on actions that can be taken within current constitutional arrangements. It is the Scottish Government's view that the full powers of independence would enable an even more ambitious and joined-up approach to transforming Scotland's economy, delivering greater benefits to our population.

Box A: A Wellbeing Economy: Thriving Across Economic, Social And Environmental Dimensions.

A wealthier economy and a fairer economy go hand in hand: the most productive economies in the world also score highly on wellbeing indicators.

A wellbeing economy, based on the principles of prosperity, equality, sustainability, and resilience, is at the heart of our vision for the economy in 2032. It means taking a broader view of what a successful economy, society and country is and putting people and the planet at the heart. It will improve economic resilience and in turn reduce our vulnerability to future economic and environmental shocks, improving wellbeing for current and future generations. This builds on our previous inclusive growth approach, recognising that the narrow pursuit of growth at all costs, without resolving the structural inequalities in our communities or respecting environmental limits, is reductive.

Scotland is already leading this agenda on the international stage as a member of the Wellbeing Economy Governments network (WEGo) with New Zealand, Iceland, Finland and Wales, with Canada becoming a member in 2022. Scotland's National Performance Framework, first introduced in 2007, provides a clear long-term purpose and set of outcomes for Scotland's future wellbeing, and is our vehicle for delivery of the United Nations Sustainable Development Goals.

What we measure matters. Traditional economic metrics like GDP will remain an important measure but cannot be viewed in isolation. This strategy commits to publishing a new Wellbeing Economy Monitor (see section 6.4). This will include measures such as healthy life expectancy, fair work indicators, mental wellbeing, child poverty, greenhouse gas emissions and biodiversity.

Community Wealth Building is one example of our practical approach to local economic development that supports a wellbeing economy. We will also publish a Wellbeing Economy Framework, a toolkit to support local councils and regions across Scotland.

The principles of a wellbeing economy can't be achieved through simply redistributing wealth, they need to be hard-wired into everything we do in this strategy.

The rest of this document sets out the key interconnected policy programmes that will overcome long-term and short-term economic challenges, build on our economic strengths and secure international advantages in new economic opportunities, and secure economic growth and prosperity through a ruthless focus on delivery. A summary of the strategy is available at https://www.gov.scot/isbn/9781804351499

1.7 Bold Programmes of Action

There is a big prize for Scotland if we get economic transformation right.

The ambition of this strategy is not just to grow our economy but, in doing so, to transform our country's economic model so that we build an economy that celebrates success in terms of economic growth, environmental sustainability, quality of life and equality of opportunity and reward.

Our five bold new policy programmes of action will shift the economic dial and deliver our vision. They have been carefully chosen, based on the evidence and informed by the analysis in the accompanying evidence paper.^[4] They tackle the long-term structural challenges, build on our economic strengths, and position Scotland to maximise the greatest economic opportunities of the next ten years in a way that will transform the very fundamentals of how our economy works.

These five policy programmes will:

• 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;
• strengthen Scotland's position in new markets and industries, generating new, well-paid jobs from a just transition to net zero;
• make Scotland's businesses, industries, regions, communities and public services more productive and innovative;
• 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; and
• reorient our economy towards wellbeing and fair work, to deliver higher rates of employment and wage growth, to significantly reduce structural poverty, particularly child poverty, and improve health, cultural and social outcomes for disadvantaged families and communities.

The five policy programmes are all interconnected, mutually reinforcing (see Figure 3) and should not be seen in isolation. A new delivery programme forms the sixth programme of action. Modelling contained in the accompanying evidence paper estimates that this strategy could increase the size of the Scottish economy by at least 4.9% (or £8 billion) more than it otherwise could have been in 2032.^[5]

Our economic model seeks to position Scotland as a more entrepreneurial nation, driving the innovation needed to seize new economic opportunities. That, in turn, should increase the productivity of organisations, both public and private, and boost overall regional and national productivity. When more productive organisations work with a more productive public sector to invest in upskilling the workforce, to break down structural barriers to participation and to fairly share the benefits of success, we can increase wages, reduce poverty and inequalities. That then enables more people to work in more entrepreneurial ways, repeating the cycle.

Entrepreneurs and an entrepreneurial mindset are vital at a time of change. It is people who make the difference. We will create a culture in which entrepreneurship is encouraged, supported and celebrated, and where Scotland is recognised as one of the best countries in the world to start and grow a business.

Rapid global decarbonisation will represent a profound change, far outwith the control of any government or sector. The transition to net zero is not just an environmental imperative but an economic opportunity – one where Scotland will become world-leading and secure first-mover advantage.

We will deliver a step change in our productivity performance and address regional inequalities in economic activity as well as boosting traditional and digital infrastructure across every sector, and every region, of the economy.

A skilled population is fundamental to business productivity and economic prosperity. We will refocus our activity on the transition to net zero, the digital revolution and lifelong training, making sure that employers have the skills they need.

Significantly reducing poverty boosts our economy but achieving it requires better wages and fair work. We will ensure that work provides a sustainable standard of living and a genuine route out of poverty.

This strategy is intentionally focused on a small number of priorities; it does not seek to do everything. It focuses on the programmes with the greatest potential benefit and on how to achieve them. In combination, these bold new programmes of action will transform the Scottish economy over the next decade and drive economic opportunities.