Scottish Spending Review 2011 and Draft Budget 2012-13

Chapter 2 Accelerating Economic Recovery

INTRODUCTION

When this Government was first elected in 2007, we made clear that we would focus our efforts and resources on delivering faster sustainable economic growth with opportunities for all of Scotland to flourish. This remains the central Purpose to which all our activities are targeted.

Global economic conditions have changed markedly since then, however, following the deepest worldwide recession in over 50 years.

At the first signs of the downturn, we responded by launching a detailed Economic Recovery Plan which protected jobs and supported the Scottish economy at its most difficult time. Our actions helped to steer Scotland through a recession that - while hugely damaging - was both shorter and shallower than for the UK as a whole.

As we look forward however, it is clear that global conditions remain challenging. At this stage of the economic cycle, securing sustained economic recovery is the most important challenge that we face. Our Budget gives clear priority therefore to efforts which will accelerate economic recovery, protect jobs and establish the foundations for long-term sustainable economic growth.

PROGRESS SINCE 2007

Since 2007, we have taken forward a range of initiatives to ensure that Scotland is well placed to take advantage of new opportunities as the recovery gains traction. We have also worked hard to boost the resilience of the Scottish economy in the face of tough global conditions.

We have:

• delivered the Small Business Bonus Scheme which has removed or reduced the rates burden for tens of thousands of business properties across Scotland;
• promoted economic security through our policy of no-compulsory redundancies in the areas under our control;
• frozen the council tax to help boost household incomes, against a backdrop of rising inflation and increasing UK Government taxes;
• attracted major international companies and new investment to Scotland which will help create thousands of jobs;
• funded over 300,000 training opportunities - a figure which includes a record 25,000 Modern Apprenticeships in 2011-12;
• maintained free higher and further education;
• established the Scottish Investment Bank which is now open and investing in Scottish companies;
• taken significant steps to address the effects of poor health on the economy by investing in alcohol and drug misuse prevention and improving health outcomes, such as heart disease, stroke and cancer;
• supported jobs, particularly in the construction sector, through our programme of record infrastructure investment. For example we have delivered the Airdrie-Bathgate Rail Link Project, the M74 Completion Project and the M80 Stepps to Haggs upgrade. We are delivering projects on time and on budget;
• overachieved on our efficiency targets allowing us to re-invest the proceeds in our public services and economy;
• taken steps to modernise the planning system making it more effective, reducing delay and helping promote economic growth and sustainable communities;
• undertaken £1.7 billion of investment in affordable housing over the period 2008-11, and completed around 21,500 new or improved affordable homes delivering a vital boost to Scotland's construction sector;
• focused regeneration investment in some of our most disadvantaged communities to support people into jobs and improve wellbeing; and
• supported the activities of our enterprise agencies to promote business start-ups and provide new opportunities for existing businesses to grow.

The actions we have taken have helped support the Scottish economy during this challenging time and put in place the foundations to help deliver faster long-term sustainable economic growth.

We are witnessing signs of recovery in the Scottish economy. Over the year to May-July 2011 employment levels in Scotland increased by 36,000, higher than the 24,000 rise in aggregate UK employment over the same period. Scotland's employment rate is now the highest of any UK nation, while we also have lower unemployment and lower inactivity than the UK as a whole.

Global economic conditions remain challenging however, and more needs to be done to create jobs, and, in particular, provide opportunities for our young people. Our efforts to accelerate the recovery are not being helped by the actions and policies of the UK Government - particularly the scale and profile of the spending cuts - making it all the more important that we take advantage of every available opportunity within our own powers to promote growth and employment.

PRIORITISING SPEND TO ACCELERATE ECONOMIC RECOVERY

Our top priority in this spending review is therefore accelerating the recovery, boosting jobs and promoting economic security. We will continue to respond flexibly to new pressures as they emerge and tackle remaining obstacles to growth.

Our Government Economic Strategy outlined our plan for recovery, with a particular focus on three key priorities: capital investment; access to finance; and enhanced economic confidence through prioritisation of growth, employment and income security.

Within the constraints of the current devolution settlement, we will continue to do everything possible to promote growth and secure jobs in these three priority areas.

However as we are constrained by the powers within our control, we have urged the UK Government to take urgent and decisive action to protect growth and jobs.

Recognising the importance of investment to economic recovery we are prioritising capital spend to maximise its impact on jobs and the economy. Investment is usually one of the first elements of aggregate demand to contract during a recession. However, it is also vital to growth as it not only provides a timely boost to economic activity and jobs, but it creates a legacy of assets which can have long-lasting economic benefits.

Chapter 4 provides further detail on our plans for capital investment. It highlights how, within our fixed spending envelope, we will take forward an ambitious programme of infrastructure investment over the next few years. This will include major projects such as the New South Glasgow Hospitals and the Forth Replacement Crossing - the largest civil engineering project in Scotland in a generation.

We will also boost the level of funding available for capital investment, including switching money from our resource budget to fund new capital projects. We will also tap into new, innovative sources of finance, leverage in private and European funding wherever possible and utilise new forms of borrowing when they become available.

For example, we are expanding the infrastructure investment programme by:

• switching £200 million each year from resource budgets to boost capital programmes;
• taking forward a new pipeline of revenue financed investment worth up to £2.5 billion, to be delivered through the Non-Profit Distributing ( NPD) model;
• implementing innovative measures such as Tax Incremental Financing ( TIF), the National Housing Trust ( NHT) and investment through the JESSICA Fund; and
• taking a proactive approach to public sector asset management through the Scottish Future Trust ( SFT) led hub programme.

Taken together, these actions will work to help offset the worst effects of the UK Government's cuts to our capital budget.

In addition to prioritising our own capital spend, we are also taking forward a range of initiatives to boost private sector investment in Scotland's economy.

We are maintaining pressure on the UK Government and banks to ensure that lending targets are met, and that viable businesses - particularly our Small and Medium Sized Enterprises ( SMEs) - have appropriate access to affordable finance. We will continue to support the Scottish Investment Bank in its efforts to work with early stage innovative technology based businesses, and growth and exporting companies.

Alongside this, our National Renewables Infrastructure Fund aims to tap into the appetite in the private sector to invest in renewables in Scotland. This one sector, above all others, will provide a focus for new private sector capital investment in Scotland and we are determined to lead this transformational change to Scotland's economy and deliver on our ambitions for this sector.

Our Budget also sets out the measures we are taking to enhance economic confidence in Scotland.

Our pay restraint policy will continue to support thousands of public sector jobs across the Scottish economy, while the Scottish Living Wage and our pay awards will protect the incomes of those earning the lowest in the public sector in Scotland. In recognition of the challenges faced by households in these tough financial times, we will continue to implement core economic and social commitments through our Social Wage, including the abolition of prescription charges and our promises on free higher education and free personal care.

Our tax policies, including retaining the Small Business Bonus Scheme and freezing council tax, will help Scottish households and businesses at this difficult economic time. This is especially important in the light of rising energy bills, high inflation and increases in UK taxation.

Finally, we are also taking direct action to tackle unemployment and ensure that people who are out of work or underemployed - particularly our young people - have access to the right training, skills or education opportunities to meet their needs. We will deliver 46,500 training opportunities this year - the majority of which will be targeted at our young people - including a record 25,000 Modern Apprenticeships.

SUPPORTING SUSTAINABLE ECONOMIC GROWTH

Alongside these plans for accelerating recovery, our Government Economic Strategy sets out the actions we are taking to drive sustainable growth and develop a more resilient and adaptable economy.

The Government Economic Strategy identifies six Strategic Priorities which drive growth most effectively: Supportive Business Environment; Transition to a Low Carbon Economy; Learning, Skills and Wellbeing; Infrastructure Development and Place; Effective Government; and Equity.

These Strategic Priorities represent the policy levers that shape the drivers of growth - Productivity, Competitiveness and Resource Efficiency; Participation in the Labour Market and Population Growth.

They also provide the focus for delivery of the desired characteristics of growth - Solidarity, Cohesion and Sustainability. In doing so, the Strategic Priorities will ensure that by tackling the causes of inequality, barriers to economic opportunity and environmental concern we will make our nation fairer and more prosperous.

The Strategic Priorities are closely integrated, with linkages and interdependencies between each priority.

In delivering these Strategic Priorities, the entire public sector has an important role to play. The coordination and alignment of contributions from across the public sector will be essential to the success of the Government Economic Strategy.

Government Economic Strategy

The Government Economic Strategy focuses the actions of government on six Strategic Priorities which will accelerate recovery, drive sustainable economic growth and develop a more resilient and adaptable economy.

Our ability to promote prosperity and jobs depends on the performance of our businesses - both large and small. This is why we are committed to maintaining and further investing in a Supportive Business Environment.

Reflecting the opportunity we have to take advantage of Scotland's relative comparative advantage in the low carbon economy we have established a new Strategic Priority - Transition to a Low Carbon Economy. Delivering our growth strategy for business and supporting the transition to a low carbon economy requires a solid foundation of skills, infrastructure, effective government and equity.

Our Strategic Priority on Learning, Skills and Wellbeing acknowledges therefore that a skilled, educated and healthy workforce is essential to creating a more competitive and resilient economy.

Our focus on Infrastructure Development and Place seeks to harness the strength and quality of our cities, towns and rural areas. And we will ensure that Scotland is positioned to take full advantage of the opportunities offered by the digital age.

Effective Government is fundamental to the successful implementation of the Government Economic Strategy, as it is only by the actions of the public sector being fully coordinated and aligned can we maximise Scotland's potential.

As well as being a desirable outcome and characteristic of growth, Equity - social, regional, and inter-generational - is also a key driver of growth and jobs. Only by ensuring that everyone has an opportunity to succeed - and by tackling the causes of the long-standing problems in Scottish society that act as a constraint on individuals and communities - will we fully achieve the nation's potential.

Key initiatives across these Strategic Priorities include:

• introducing four Enterprise Areas in Scotland, including sites with a particular focus on low carbon manufacturing opportunities, so as to maximise their economic impact and attractiveness to investment;
• providing advice and support to help SMEs grow, hire staff and take on apprentices;
• continuing to deliver the Small Business Bonus Scheme and match the business rates poundage set in England;
• promoting Scottish exports to capitalise on the significant opportunities in growth markets; with an ambitious target to deliver a 50 per cent increase in exports by 2017; as part of this we will look to strengthen trade support particularly in Scottish Development International's ( SDI) Overseas Trade and Investment Centres;
• streamlining investment in innovation and commercialisation to boost productivity and translate great business ideas into great business practice;
• establishing a Next Generation Digital Fund to accelerate the delivery of superfast broadband across Scotland with a particular focus on rural areas;
• better aligning our resources with European Funds to support our growth agenda across the whole of Scotland;
• continuing to implement the modernisation of the planning system;
• working with our cities and city regions and recognising the critical contribution they make to the whole of Scotland as drivers of economic growth, we will develop a Cities Strategy to support more effective collaboration to optimise that growth;
• developing a Regeneration Strategy that will support our most disadvantaged communities to become socially, economically and physically sustainable;
• maximising the public sector's direct contribution to the economy through smart use of public procurement, in order to promote jobs and growth, boost training and apprenticeship opportunities and help SMEs compete effectively for contracts; and
• taking a strategic approach to our international engagement, including the deepening of trading links, to promote sustainable economic growth. This engagement will take place across a range of areas where Scotland has expertise, from energy and climate change to education, culture and tourism.

Scotland's greatest asset is its people and our competitive position in the global economy rests on continued improvement in education, training and research. This Budget therefore gives clear priority to helping enhance the life chances for our youngest Scots, to tackling unemployment, and to providing more opportunities for our young people.

Through our Opportunities for All initiative we will ensure that every 16-19 year old in Scotland who is not in work, a Modern Apprenticeship or education will be offered a place in education or training. This will complement a range of measures to support employment including:

• delivering over 46,500 training opportunities - the vast majority of which are targeted at young people;
• funding a record 25,000 Modern Apprenticeship new starts in each year of this Parliament, including developing Technical and Graduate Apprenticeships;
• ensuring that access to higher education is based upon ability to succeed rather than ability to pay;
• maintaining bursary support to help young people remain engaged in college and training;
• investing in 14,500 pre-employment training opportunities which will be aligned to Scotland's local labour markets;
• completing the roll-out of Activity Agreements to help our most vulnerable young people remain in education and training; and
• continuing to fund the Educational Maintenance Allowance for young people in school and college which will help support the least well-off students in Scotland.

It is our intention to use procurement as a lever for economic growth, and to this end we intend to require recipients of major public contracts to deliver new training, employment and apprenticeship opportunities.

OPPORTUNITIES FOR GROWTH

This Budget is being delivered at a time of ongoing uncertainty in the global economy. The recovery - across all advanced economies - has been much weaker than had been initially envisaged. As a small open economy, Scotland cannot expect to be immune from such pressures.

Although we continue to face significant challenges, there are also new and exciting opportunities - for example in our key sectors and through greater internationalisation - that offer considerable potential for Scotland. We are focusing our efforts on taking advantage of these opportunities to promote growth, create jobs and overcome any barriers which prevent people in Scotland from fulfilling their potential.

As highlighted in the Government Economic Strategy, one area where we have a tremendous opportunity is from the transition to a low carbon economy.