Towards a Robust, Resilient Wellbeing Economy for Scotland: Report of the Advisory Group on Economic Recovery

Foreword

"Those who wish to sing, always find a song."

Old Scandinavian proverb

If the monumental scale and nature of this economic shock is not a catalyst to accelerate change and to find new bold, radical interventions that will transform Scotland's economy, then nothing ever will be. We must be willing to revisit old demarcation lines without bias, and to discover new methods and levels of collaboration as we navigate our path of rehabilitation, recovery and re-imagination. The importance of national leadership in a crisis is paramount. It must demonstrate an adherence to our sense of purpose, maintain our ambitions, and - more than ever - be based on the values that we wish to be the hallmarks of our country.

In the world before Covid-19, Scotland had the ambition to become a robust wellbeing economy. That is one that generates strong economic growth with the concomitant creation of quality jobs, and that does so with an unequivocal focus on climate change, fair work, diversity, and equality. Diversity - in all its aspects - is not simply a moral issue; there is conclusive evidence that diversity of thinking leads to better outcomes.

The advent of this societal disruption makes it necessary to reconsider this ambition. The focus on establishing a robust, wellbeing economy matters more than ever, but we must now recognise more explicitly the essential nature of resilience. We need to build readiness to deal with the next cataclysmic disruption which will inevitably arrive either for current generations or for future ones. Next time it may be another pathogen, or it may be related to cyber-attacks or to climate change or some as yet unknown source. The fragility of our society and our economy, like that of others, has been laid bare these past few months. The public health crisis which has tragically taken so many lives prematurely cannot be allowed to lead to an economic one that is socially destructive. And the pursuit of building greater resilience must not be considered negotiable.

Prior to the onset of the health crisis, we faced a number of significant economic challenges. Extended steady but low economic growth combined with relatively full employment indicates structurally low productivity. Our export base is narrow. Our population is an ageing one. There is the jeopardy, as well as the opportunity, of the transitions associated with climate change and the so-called fourth industrial revolution, which will be characterised by digitisation, the use of data, machine learning and artificial intelligence. And, of course, the long-term ramifications of Brexit - the outlook for which has worsened markedly. These challenges have not gone away.

But we have a new starting point. Three themes have emerged as even more dominant than before: inequality, education, and unemployment. The last few months have exposed and illuminated the scale of inequality across the world and here in Scotland. And the events of the last few weeks have brought an acute, overdue point of inflection in how we reflect on racism. The health crisis has spawned further inequalities, and the relaxation of restrictions will create yet more. It is illustrative to consider that 90% of the top 50% of earners in the country can work from home, whilst 90% of the bottom 50% cannot do so. Many of the lowest paid essential workers have put their health and that of their families at risk during this crisis. There are countless studies that demonstrate the impact of 'learning loss' when young people are denied access to conventional schooling. Once again, it is most pronounced in disadvantaged communities, where the alternative to formal delivery is very constrained.

The central importance of the role of education in the reconstruction of the economy is unarguable, and the breadth of what this means needs to be reconsidered. We need to accelerate existing concepts being developed in schools to prepare some children in their later years for vocational roles and apprenticeships. We must strive to ensure that learning is designed to match the skills we need in Scotland in future. Reskilling and lifelong learning will be vital too. Our universities are the envy of many around the world. We must protect them but also leverage them to greater effect; we must transform acknowledged world-class research into comparable levels of development, and, in turn, large-scale commercialisation. We need an education-led recovery.

The prospect of an inevitable sharp rise in unemployment demands direct and urgent intervention. We need to create jobs at an unprecedented rate, and also to ensure that they are quality jobs, holding firm to the principles of fair work. There are two imperatives here. Firstly, we must take specific care to shelter those currently in their mid-teens through to those in their mid-twenties. Over the next few years they will be the young adults due to leave different stages of education, or be those at risk of losing their jobs now having only just embarked on careers. We know well from previous recessions that there is a material risk of long-term scarring for this cohort of young people. They do not deserve it. We must act now to mitigate this risk. The second is that 79% of jobs in Scotland exist in the private sector. So the solution to unemployment will depend heavily on how we mobilise the private sector to create employment.

The Advisory Group on Economic Recovery (the Group) was asked to address the challenges beyond the need to provide emergency life support to the economy. The steps taken by the Scottish and UK Governments to provide such immediate protection for individuals and businesses have been essential and critical. But we must chart a future path for the economy. The Group was purposefully designed to be small enough, with only eight members, to act with pace and agility. Central to our approach, however, has been an intensive dynamic dialogue with a broad church across all sectors - public, private, third - and around the country. In particular, Lord Smith has led a structured conversation with business leaders in Scotland on our behalf. The level of engagement over just a few weeks - through meetings, formal submissions and less formal contributions - has been both substantial and welcome. Given the sheer speed with which we have had to proceed, there will be some who may feel they didn't get a sufficient opportunity to engage fully, but hopefully not many. The kernel of the role of the Group has been to discuss, challenge and curate the ideas and suggestions emerging from the external engagement.

Our approach has been to view Scotland's economy through the lens of four economic pillars of capital: financial and physical capital, natural capital, human capital, and social capital. This is not a novel approach insofar as it has been used elsewhere, including by the OECD, but it is a new approach for Scotland. It is helpful in a range of ways. For one, it enables us to take a holistic view of our national balance sheet in a progressive manner that is entirely consistent with the barometer that is the National Performance Framework. In doing so, we have sought to treat each pillar as equally important; to understand their interaction; and to pursue interventions that will first protect and then progress each of them. A concept such as 'Place', for example, weaves like a thread through the four pillars: others do too. The approach has served us very well for the purpose of our analysis, but, given the interaction between the pillars, we opted not to apply it slavishly to classify our recommended interventions.

The backdrop to those interventions will be one of constrained public sector finances. There are inevitable consequences that flow from this premise. The calculus of prioritisation, which always matters, becomes even more pivotal. And the difficult bedfellow of de-prioritising to create headroom needs to be tackled. The Fiscal Framework is due to be reviewed next year, and we encourage a gear change that may allow it to be concluded more quickly. Quite separately, however, there needs to be a plan to unlock financial borrowing at the exceptionally low prevailing long-term interest rates. We are agnostic on how the Scottish and UK Governments choose to achieve this outcome. A case of what matters most not being at the mercy of what matters less.

The identification of areas where change might be executed through both willingness and determination, but at limited financial cost, should be given due attention. An example of such an area is regulation and planning. We should adopt a pragmatic approach that seeks to maintain adequate standards but breathes more life into sectors such as tourism and hospitality, renewables, and affordable housing. Progressive change will play an important role in redefining Scotland's prospectus for inward investment - a subject that we discuss more broadly in this report.

The financial constraints also manifest themselves as a pressing need for the financial might of the private sector to be deployed alongside government to stimulate economic activity and create jobs. Strong relationships between all parts of our society will be a fundamental element of recovery plans. At this time it is particularly important that we make a fresh start on the relationship between business and the Scottish Government. For some sectors - notably financial services, agriculture, and renewables - the relationships are both mature and reasonably effective, but there remains authentic concern expressed more broadly that engagement with the Scottish Government needs to be transformed. It is uncontroversial to say that when one party in a relationship says that it's not working, then it isn't. But it is also a truism that, commonly, both parties have to adapt to make it work.

So this report calls for both the private sector and the Scottish Government to embrace an opportunity to reset their engagement. Some suggestions are included in our recommendations: but this is a sphere where progress will be judged over time by action, not words. This is the time to start.

To extend that point further, this report was commissioned by the Scottish Government but its call to action is aimed beyond government to all parts of our society. Mention has already been made in relation to the private sector, but the cultural sector and the third sector have urgent roles to play too. Culture will play a definitive role in the recovery of our wellbeing, and it must be an intrinsic element of how Scotland is represented at home and abroad. The sector must be cultivated and nourished for the greater good.

The framework and apparatus of economic support in Scotland is not without its critics. The temptation at this juncture is, therefore, to tear some of it apart and to recast a new model. Now is not, however, the right time to be absorbed in abstract arguments around the creation of new institutions. There is a powerful argument that the landscape is already too confusing and cluttered. So, for example, the likely emerging Scottish Government stakes in larger businesses should be managed within government, albeit there needs to be confidence in the capability and capacity to do so. This may provide an opportunity for the Scottish Government to draw on businesses to second senior executives.

On the subject of broader restructuring of economic development, the parliamentary consequences - in a year ahead of Holyrood elections, no less - would be to run the risk of a bureaucratic vortex when we can least afford it. The right answer is to redefine and repurpose the existing model to meet the new challenges and opportunities that we confront today. We can do so by considering our national, regional, local and international needs and by adapting the thrust of existing activity to empower regions, cities and local communities.

Furthermore, this requires the careful but immediate development of an economic and investment prospectus at each level, recognising the merit of judicious choices over where one city or region, say, is best placed to take the lead to allow others to follow. In developing prospectuses for Scotland at national and other levels, we must focus on where we possess natural strengths or where we have a genuine belief that we can develop relative competitive advantage. An obvious example is the desire for Scotland to have a strong green spine to our recovery.

Had we not concluded more than two years ago that we needed the Scottish National Investment Bank, we would need to do so now. The Bank, which opens its doors this year, will play a transformative role by focusing on long-term, mission-led patient capital.

We have an entirely legitimate ambition to be near the top of the table of performers with respect to natural capital. We must focus on green trade and the opportunities for carbon capture and storage in the North Sea, and take a leading role in progressive calibration including carbon consumption. Moreover, to make our carbon targets realistic we must address and tackle the emissions related to transport and agriculture. We must also recognise that natural capital goes beyond carbon-related dimensions to encompass the natural beauty of our country that we must protect and develop. By doing so we can underpin the recovery of tourism and hospitality which are a fundamental characteristic of Scotland's brand. Other brand considerations include the aforementioned university sector, a focus on the right skilled talent pool, our attractiveness as a technology hub, and our identity and excellence in the culture spectrum.

Trust must lie at the heart of a robust, resilient wellbeing economy. Since the global financial crisis, trust in many components of society has been diminished. During this crisis some have restored trust while others have eroded it further. It is the glue which binds the pillars of capital together and reinforces our sense of belonging. Our approach to economic recovery must reflect the importance of economic growth, but in a manner that builds trust. Together, we can pursue our aims with a level of confidence that is pivotal to sustainable prosperity in Scotland.

Benny Higgins