Sheffield Political Economy Research institute: First Minister's speech, November 2016

It's a pleasure to be here. There are, of course, many links between Scotland and Sheffield.

Indeed, I was interested to find out that Mary Queen of Scots actually spent more of her life in Sheffield than she did in Scotland. She stayed here for 14 years.

Admittedly, she didn't have much choice – she was in prison for all of those 14 years! And so I am delighted – and quite relieved – to receive such a warm welcome here tonight. And I can assure you that my main regret about this visit, is that I cannot stay here for longer.

There are of course many other significant – and happier – connections between Scotland and this city, and indeed this University.

Both Scotland and Sheffield celebrated last month when Sir Fraser Stoddart – a graduate of Edinburgh University, and a former lecturer here at Sheffield – was awarded the Nobel Prize for Chemistry.

And, from my time as Cabinet Secretary for Health in Scotland, I am very aware of the quality of the work done by the School of Public Health here. Its Alcohol Research Group carried out a study on minimum unit pricing of alcohol, which underpins the Act which the Scottish Parliament passed on that issue in 2012. That legislation has faced significant court challenges, but we may now be getting towards a position where we can implement it. If that is the case, then work done here in Sheffield will contribute to saving dozens of lives in Scotland every year.

The Public Health School is a good example of the excellence of this University's work. And so of course is this research institute. Sheffield University's political economy research centre was launched in 1994; and the Sheffield Political Economy Research institute (SPERI) itself was then established in 2012. In recent years, it has developed a strong reputation for its academic work, and its efforts to improve the public understanding of political economy. This annual lecture is one part of that very important wider mission. I am honoured to have been asked to deliver it.

As Tony (Payne, Co-Director) said, I want to talk tonight about economic policy after Brexit. I'm going to argue that the result of the EU referendum presents all of us – and certainly the UK Government and the Scottish Government – with two major challenges. Following the vote, there is a clear need to find – if not the best outcome, then perhaps the least-worst outcome – as we negotiate new agreements with the EU and the rest of the world.

And the EU referendum also posed a broader challenge for those of us who support free trade, who welcome immigration and who believe that the benefits of globalisation, if properly managed, should outweigh the benefits. It's how we make those policies benefit everyone in our society – how we guarantee that an open economy commands widespread support, instead of breeding popular resentment.

EU referendum

And in dealing with this issue I'm going to begin – as you might expect – by looking at the outcome of the EU referendum. After all, our response to that outcome will define Scotland and the rest of the UK for decades to come. It won't simply determine our economic prosperity, it will shape the sort of society we become.

Scotland, as most of you will know, voted very clearly to stay in the EU – by 62% to 38%. And as a result, there has been a lot of speculation about whether Brexit will lead to a second referendum on independence. There are good reasons for that. After all, before the 2014 referendum on independence, one of the key arguments made by those who opposed independence was that Scotland could only safeguard our place in the EU if we stayed in the UK. That argument turned out to be rather false.

In many respects, in fact – and as a direct result of the Brexit vote – the UK that Scotland voted to be part of in 2014 is likely to change fundamentally. So it is entirely reasonable for Scotland to have the option of reconsidering the decision that we took in 2014.

However moving towards a second referendum on independence has not been my starting point in addressing the result of the EU referendum. My clear starting point is to find the best way for Scotland to retain the benefits of EU membership – I want to secure, as far as possible, the outcome Scotland voted for in June. And to achieve that, I'm pursuing two parallel approaches.

The first is one which directly affects all of you. The Scottish Government will do everything we can to influence the UK Government's approach to Brexit.

Now, it's fair to say that so far we have found our discussions with the UK Government – and I'm trying to be diplomatic here – less enlightening than we would have liked.

I was taken aback two weeks ago to be accused of trying to undermine the UK Government's negotiating position on Brexit. It is – quite literally – impossible for me to undermine the UK Government's negotiating position on Brexit. I have absolutely no idea what it is! Indeed, I'm not even sure that it exists.

In spite of that we will continue to work in good faith with the UK Government.

And in doing so, we intend to set out the Scottish Government's clear view that the UK as a whole should seek to retain full membership of the single market – meaning, among other things, that we can continue to trade with our EU partners without tariff and non-tariff barriers.

There is a strong democratic justification for that approach. After all, 48% of the electorate voted to remain in the EU. So did two of the four nations of the UK. And Sheffield is a perfect example of how close the referendum was in much of England. This city voted to leave by 51% to 49% – only 6,000 votes separated the two sides.

I completely accept that there was a narrow majority in Wales and England for leaving the European Union. However I don't believe it can be concluded that there was a majority anywhere for leaving the single market. In fact, voters were often told that leaving the EU did not necessarily mean leaving the single market.

So there is no meaningful democratic mandate for what is generally known as a hard Brexit. I do not believe that there is a Parliamentary majority for hard Brexit, either. In those circumstances – surely – single market membership is the obvious consensus position. That is a point which may well be made forcibly in Parliament, following last week's court decision.

And single market membership would also be the least damaging outcome for individuals, businesses and communities across the whole of the UK.

It's maybe worth looking at the universities sector as an example of that. Scotland has five universities which – like Sheffield University – are ranked in the world's top 200. In fact Scotland has more world class universities, per head of population, than any other country in the world apart from Luxembourg. So for Scotland, as for Sheffield, our universities are an incredible cultural, social and economic asset.

And yet just last week, the Principal of Edinburgh University – not someone who is known for exaggeration – told a House of Commons Select Committee that the impact of Brexit on Higher Education – and I quote – 'ranges from bad, to awful, to catastrophic'.

It's easy to see why. In Scotland, one sixth of our academic staff are EU citizens from outside the UK. So are one sixth of our postgraduate students. Those EU students are disproportionately likely to be in subjects such as science and technology, which will be critical to our economic success in the future.

If you look at research, Scotland benefits hugely from the opportunities for collaboration which are provided by European programmes. However, the only countries – other than EU member states – that have full access to the European Research Area are members of the European Free Trade Association (EFTA) and countries which are candidates for membership of the EU.

Even being in EFTA isn't ideal if – like Switzerland – you are outside the single market. In fact, Switzerland recently had its status as a research partner downgraded, after it voted to abandon agreements with the EU on the free movement of people.

And so single market membership surely provides the best basis for minimizing the damage that Brexit will do to higher education. It will enable universities to continue to collaborate within the European Research Area. It will give security to the students and staff who do us the honour of coming here to study and work. And it might just mitigate the reputational damage that Brexit has already caused to the UK, in a sector which competes for the very best people around the world.

And of course the consequences of Brexit go far beyond our universities. I've just come here from Sheffield's Advanced Manufacturing Research Centre. It's a magnificent facility. It demonstrates how much potential there still is in high value manufacturing on these islands. But it is likely that our manufacturing and export industries will suffer if they are outside the single market.

The Institute of Fiscal Studies tried to quantify the consequences of this in August. It estimated that losing our membership of the single market could cost the UK approximately 4% of GDP. That's almost two years of average economic growth.

Strathclyde University's Fraser of Allander Institute has estimated that a hard Brexit could cost up to 80,000 jobs in Scotland after 10 years, and see real wages fall by an average of £2,000 per year.

So when the UK Government negotiates to leave the EU, single market membership should be sought as a priority. Some parts of that – such as retaining freedom of movement – will not satisfy everyone. However there is no ideal solution which does satisfy everyone.

Although a hard Brexit might appease some members of the UK Cabinet, it would damage trade, reduce employment and cause unnecessary hardship in communities across the country. It is economically undesirable and democratically unjustifiable.

And for that reason – and this is the second strand of our approach – the Scottish Government is also investigating whether distinctive solutions are possible for Scotland.

In particular, if the current UK Government decides to take the rest of the UK out of the single market, then the Scottish Government will seek a separate settlement that allows us to stay in. We will publish options for doing that in the coming weeks.

It's worth saying that allowing for distinctive solutions in different parts of the UK won't be straightforward. But nothing about Brexit is straightforward. We're already hearing discussions about the options for a 'flexible Brexit' – with the possibility of different deals for sectors such as car manufacturing and financial services, and for areas such as Gibraltar. There's clearly a very strong need to look at special arrangements in Northern Ireland, to protect the peace process and avoid a hard border between north and south.

All of that underlines the fact that we are currently in unprecedented circumstances. And so all of us – in Scotland, across the UK and throughout the EU – should approach discussions with creativity, flexibility, and a genuine desire to secure the best outcomes. If we do that, distinctive solutions might become possible for Scotland.

Importance of inclusive growth

And alongside our work to find those solutions, the Scottish Government will continue to focus on the second key challenge which the EU referendum has highlighted.

This is an issue which is becoming apparent in many parts of the developed world. We know that policies such as free trade and immigration will often bring benefits to the economy as a whole, but they also have the potential to disadvantage particular areas and particular groups.

So the sustainability of those policies is increasingly dependent on our ability to ensure they benefit everyone. As Christine Lagarde, the Managing Director of the IMF, said in a speech two months ago: "If we want to keep globalisation alive for the next generation, there is no alternative to ensuring that it works to the benefit of all."

In my view, this focus on inclusive growth, as it is often known, is – first and foremost – a matter of basic morality. Everyone in any society should have a fair chance to fulfil their potential.

It's also an issue of basic economic efficiency. There is strong evidence that inequality in western economies has harmed growth. The UK is a good example. The Organisation for Economic Co-operation and Development (OECD) has estimated that between 1990 and 2010, rising inequality here reduced growth by nine percentage points.

And inclusive growth is also, increasingly, a political imperative.

The vote to leave the European Union had many causes. But we know that people on low incomes were more likely to want to leave. When you allow for student numbers, so too were areas with low employment rates.

This was highlighted in a recent report from the Inclusive Growth Commission of the Royal Society of the Arts. It pointed out that the referendum 'has revealed the extent of voter dissatisfaction with our current economic model'.

And it quoted a councillor who had spoken about the referendum at one of its evidence sessions here in Sheffield.

He said: "We could've told you our communities would've voted leave before Christmas. Project Fear over the economy crashing if we voted to leave fell empty on the ears of many people. For them, the economy crashed ten years ago."

That quote summarises a basic truth. There is no point in telling people to fear change, if their current circumstances don't inspire hope.

And although the quote I've just used comes from Sheffield, it surely speaks of the experience of many people across these islands. Certainly, although I am proud that Scotland voted to remain in the EU, I am acutely aware that one million people voted to leave.

Now, this sort of issue isn't unique to these islands. If we look across the Atlantic, we see a presidential election where one candidate is promising to re-establish tariff barriers and literally build walls.

However it is clearly an important problem in the UK. Perhaps the most worrying recent development here is some of the language we are now hearing about immigration.

People who choose to come and live and work in Scotland and the UK make a huge contribution to our economy, our public services and our wider society. They are our neighbours, our colleagues, our friends. And, of course, many British citizens choose to live, work and study in other EU countries. It is a two way street.

And so I never expected that I would hear a governing party say – as happened in Birmingham last month – that companies might have to publish lists of overseas workers. Or that doctors from overseas might be 'allowed' to stay in the UK until 2025 – as though we were doing them a favour by allowing them to work hard and save lives in the health service.

I'm well aware that the scale of immigration in England makes it – understandably – a bigger topic of debate than in Scotland. And people may often have legitimate concerns about whether increased immigration affects their own access to public services and housing. But, in my view, the answer isn't to target immigration as the source of these problems; it's to invest in public services in order to address those legitimate concerns. It's to generate hope rather than play on fear.

Impact of austerity

And a key part of my argument tonight is that UK economic policy – arguably over several decades, but particularly in recent years – has not given enough people, enough grounds for hope.

It's worth looking back at the final part of last year's SPERI lecture, by Lord Skidelsky. It was called 'The Failure of Austerity'. He highlighted evidence that UK Government policy since 2010 had reduced the UK's GDP by 5%. He concluded, rather gloomily, that 'the damage is set to continue'.

The party I lead argued strongly against austerity economics before the 2015 UK General Election – that's something which Lord Skidelsky was kind enough to acknowledge in his lecture. So it's not surprising that I agree with his view on the cost of UK Government policy. It's a failure which has become more obvious than ever in the last year.

The current Government has already abandoned the deficit reduction targets it was elected on in 2015 – just as the previous Government abandoned, in 2012, the deficit reduction targets it set itself in 2010.

There's a good reason for that. The severity of government cuts has permanently reduced the productive capacity of the economy. As a result, cuts hindered, rather than helped, attempts to reduce Government debt. Austerity is a policy which has failed, categorically and comprehensively, on its own terms.

It has also imposed needless hardship on individuals and families across the UK. Lord Skidelsky spoke last year of the 'pain' being withstood by its victims. We know that that pain was disproportionately inflicted on women, those on low incomes and people with disabilities. Austerity hasn't just harmed our economy; it has damaged our society.

And as things stand, as Lord Skidelsky predicted, the damage is set to continue.

For example as more people move on to universal credits, more people are affected by the changes which came into force in April. They mean that most working families with children will start to see their benefits reduced when they earn £192 a week. The level was previously £222 a week, or £263 for lone parents. These changes to the work allowance, as it is called, will reduce the incomes of the affected households by an average of £1,000 a year by 2020.

A Resolution Foundation report highlights that in total, working families with low or medium incomes are likely to be £2,000 worse off in 2020 than would otherwise have been the case, as a direct result of both austerity and Brexit.

The Chancellor of the Exchequer has already made one welcome change by abandoning the Government's balanced budget target. In two weeks' time, in the autumn Budget Statement, he should go further in slowing the pace of deficit reduction, allowing for the reversal of cuts which are hurting low income households and damaging public services.

Austerity has had one other effect I want to mention. The narrative surrounding austerity has stifled rather than supported debate about the other key issues facing our economy. They include how to raise productivity; how to ensure that everyone can earn a decent living as more jobs become automated; how to adapt to the requirements of an ageing population; how to manage the move to a low or no carbon economy.

And of course there's the question which perhaps encompasses all of those: how do we ensure that sustainable growth enables people to live happier, healthier, more fulfilling lives? How do we create a good society, alongside a successful economy?

Those are the fundamental issues which all governments and societies should be asking themselves. The Scottish Government does not have all of the answers – nobody does – but we are, at the very least, beginning to ask some of the right questions.

For example last year, when the Scottish Government revised our Economic Strategy, we ensured that it focused jointly on increasing competitiveness and tackling inequality. Professor Joseph Stiglitz, one of the Nobel Laureates who serves on our Council of Economic Advisers, said at the time: "Tackling inequality is the foremost challenge that many governments face. Scotland's Economic Strategy leads the way in identifying the challenges and provides a strong vision for change."

We decided to prioritise competiveness and fairness jointly, because both are equally important – we need a competitive economy to fund the public services we value so highly.

But it is just as true that a more equal society, where everyone can participate to their full potential, will lead to a stronger and more sustainable economy. And workers who are well educated and trained, well paid and highly valued and supported, will be more productive than those who aren't.

So our economic strategy acknowledges the importance of tackling poverty; of investing in and working with local communities; and of supporting public services. It ensures for example that one of the key priorities of my government – a near doubling of childcare for all three and four year olds – is recognized for its economic impact as well as its social benefits.

But it also attempts to develop a partnership for productivity with businesses – where government invests in skills, innovation and infrastructure to build a competitive economy, and where we help and encourage businesses to invest in the capabilities of their workforce.

So businesses have been heavily involved in our improvements to vocational training for 16 to 25 year olds. They are also helping us to promote entrepreneurship in schools and to encourage start-up companies.

And the Scottish Government – as you would expect – has acted as a champion for business. In 2011, we retained our enterprise bodies at a time when regional development agencies in England were being abolished.

We have promoted economic sectors where Scotland has a comparative advantage – such as food and drink, energy, financial services and creative industries. We are currently taking additional steps to boost exports by marketing Scottish businesses around the world.

And we are supporting the transition to a low carbon economy. We have established some of the most ambitious climate change targets anywhere in the world; and we have met them five years early. That's because we see tackling climate change not just as a moral imperative, but as a source of economic opportunity.

And as part of our support for business, we work with companies to create an economy where sustainable growth benefits employers, employees and local communities.

One area where our approach is very distinct from the UK's is our focus on fair work. We established a Fair Work Convention last year. It's a partnership between Government, employers, employees and unions. We work closely and well with trade unions, as well as with business. The Convention aims to promote productivity in a way that ensures that companies and employees all benefit.

Last year we issued public sector procurement guidance which explicitly recognises fair work – including payment of the living wage – as an important consideration when we decide how public sector contracts are awarded.

We're starting to use the influence and purchasing power of government to send a clear signal. Progressive employment practices should be celebrated, not simply because they're good in themselves – although they are – but because they contribute to long-term business success.

There is still much more to do, but we are seeing some promising results. For example when I became First Minister, less than two years ago, there were fewer than 50 living wage accredited employers in Scotland. Now there are more than 600. A higher proportion of workers are paid the living wage in Scotland than in any other country in the UK.

And these social gains have not come at the expense of competitiveness. Scotland consistently outperforms every part of the UK except London when it comes to attracting inward investment. The number of registered businesses in Scotland is at record levels.

Unemployment in Scotland is again lower than in the rest of the UK – despite the fact that our growth has been hit by difficulties in the oil and gas sector in the last two years. And Scotland's productivity has grown since 2007, while the UK's has stagnated.

We still have a huge amount more to do to build the economy and the society that we want to see. But we are making progress towards achieving stronger, more sustainable and more inclusive growth.

Conclusion

At the beginning of my speech, I mentioned the fact that this institute's predecessor – the Sheffield Political Economy Research Centre – was established in 1994. Professor JK Galbraith spoke at the launch, and so I want to end by quoting some of his remarks on that day. He pointed out that economics 'is central to personal well-being and social tranquility. And to the educational and cultural advance which both ensures further economic advance, and enlarges life in general.'

His words are a reminder that fundamentally, the major choices we make in economic policy aren't about what sort of economy we want to create, they are about the sort of society we want to live in.

In everything I say and do, in responding to the result of the EU referendum, I am determined that Scotland will continue to be not just a successful, dynamic and open economy, but also a fair, inclusive and welcoming society.

In the months and years ahead, the Scottish Government will argue passionately for staying inside the single market. We value the ability to co-operate and trade freely trading with our European neighbours.

We will also argue for inclusive growth at Westminster; and we will attempt to exemplify it through our actions in Scotland.

We will work to ensure that free trade and free movement support sustainable growth. We will aim for that growth to benefit individuals and communities across the country. And we will make our economic policies serve the ends which Professor Galbraith outlined here in Sheffield more than two decades ago – personal wellbeing; cultural and educational advance; and enlarging life in general.

Because we believe that by doing that, we can help to create a wealthier, fairer, and better society. That's something which will bring major benefits to Scotland – and maybe also, to all of the nations of these islands.