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

5. Recommendations

This section builds on the assessment of sectors and regions and of the four pillars of capital set out in previous chapters. These recommendations also draw on the large amount of material submitted through the consultation, and in engagement directly with business and the wider community.

We have chosen to be selective in our recommendations, and to prioritise and highlight the interventions that we think will make the most immediate impact on the course of Scotland's recovery: supporting jobs, protecting and progressing education and skills, and thereby helping to tackle inequality. But we are very clear that action will be needed across a very wide front, involving all sectors and all parts of the country in a collective effort: our recommendations do not seek to make detailed prescriptions for each sector.

We have not sought to lay out in detail exactly how each of our recommendations should be implemented. That will be for others to determine. And while many of our recommendations are directed at the Scottish Government and its agencies, businesses, the third sector and other organisations all have an essential role to play in securing the recovery Scotland needs.

5.1 The Fiscal Framework

The UK and Scottish Governments should accelerate the review of the Fiscal Framework. It is vital that the overall funding approach is robust to address economic recovery and is resilient to future economic shocks.

The immediate crisis has required governments across the world to increase fiscal deficits to support vital public services and livelihoods. The OBR estimates that the fiscal aid provided by the UK Government to date will cost £132.5 billion, or 7% of GDP, in 2020-21.^[24] The UK Government announced it would make available an initial £330 billion of guarantees to support firms - equivalent to 15% of UK GDP.^[25] In addition, at the end of May 775,000 people in Scotland were either furloughed or unemployed.

This fiscal response is significant in international terms, and reflects the scale of the global crisis. Internationally, the focus of the fiscal response is now beginning to shift from emergency assistance to fiscal stimulus to kick start the economy. The European Commission has announced a €750 billion package to support the recovery over the next three years, around 1.8% of GDP. Germany has announced a €130 billion support package for 2020-21, which is around 4% of GDP. The stimulus in Germany^[26] includes a VAT cut, direct funding to families, and a €50 billion climate change and innovation fund.

The UK Government's fiscal stance has led to recent increases in the Scottish Budget, leading to support of £2.3 billion in additional funding to the Scottish Government for support to businesses in Scotland. A £230 million Return to Work package to stimulate Scotland's economy in light of the coronavirus pandemic was announced on 17th June.

The availability of these various forms of support has been essential to mitigating the immediate crisis. In the weeks and months ahead, the focus of the fiscal response will shift from emergency assistance to appropriate fiscal support as the economy begins to recover.

In continuing to support business and workers over the coming transition, it is inevitable that governments will emerge from this crisis with significantly higher levels of debt and a smaller tax base. This debt will need to be managed over a long period and in a way that aids rather than hinders economic recovery. The UK's economic performance after the 2008 financial crisis shows that another round of austerity is not the right answer. At the same time however, the UK and Scottish Governments will require to achieve fiscal sustainability in the medium to long term. That will depend on a resumption of growth.

While there is wide recognition that governments should 'do what it takes' during the immediate crisis to prevent further damage in the future,^[27] the focus will shift to ensuring an agreed set of fiscal arrangements to guide government policy in the years ahead. The costs of the present crisis will need to be funded eventually, and this raises important choices for the government.^[28]

The fiscal arrangement between the UK Government and the devolved administrations needs to take into account policy autonomy and tax competition, fiscal solidarity across the UK and devolved fiscal responsibility, devolved debt and the UK's debt burden and its ability to finance itself on international capital markets.

The current Fiscal Framework binds Scotland closely to the UK Government's fiscal stance, which remains a key factor in determining the Scottish Budget. The baseline for the Scottish Budget remains the Block Grant, based on the Barnett Formula, which has historically maintained relatively higher per-capita funding for Scotland but is entirely dependent on UK spending decisions. Even though Scotland now raises a large portion of its budget through Scottish income taxes there are limited opportunities for policy autonomy, given that UK tax policy decisions fall back onto Scotland through the Block Grant adjustments.

Moreover, the Scotland Reserve and borrowing limits are extremely low in relation to the overall budget, limiting further any deviation from the UK's budget stance. In a time when governments are providing unprecedented levels of support to their citizens, Scotland's capital borrowing is less than 0.3% of GDP.

The current UK fiscal policy framework was not designed for times of emergency. The carry-over and borrowing capacity for the devolved administrations was designed and calibrated for normal economic cycles. It was not designed to enable decisions based on a long-term 'capital-based' approach as described in this report.

It would benefit both the UK Government and devolved administrations to design a model for investment in the economic recovery period, which enabled an appropriate flexibility to allow different priorities to be pursued. There is also a strong case for the Scottish Government to have greater autonomy to use targeted fiscal measures to stimulate demand or incentivise behavioural change in the recovery period.

We have identified a number of policy areas in which the Scottish Government could make significant progress in the recovery and renewal phase. The Fiscal Framework is intended to protect the Scottish Budget from UK-wide economic shocks; the crisis has demonstrated that such shocks do not necessarily impact evenly across the UK.

The upcoming review of the Fiscal Framework should look fundamentally at the scope of devolved fiscal powers. It should consider whether they enable the policy responses that Scotland will need to tackle the many challenges of economic recovery and of achieving fiscal sustainability. And it should take steps to enhance fiscal transparency, and enhance public participation in decision-making on fiscal matters, as suggested by the Scottish Human Rights Commission.^[29]

The UK and Scottish Governments should therefore accelerate the review of the Fiscal Framework, and ensure that the remit is sufficiently broad to ensure that the review covers the present circumstances. The review must identify what we have learnt during this crisis about the effectiveness of the existing framework during a serious economic shock.

5.2 An investment-led recovery

The UK and Scottish Governments should commit to a securing significant increase in access to capital investment to support the recovery. This should maintain the Scottish Government's commitment to a Mission to raise infrastructure investment and it is imperative that the Scottish National Investment Bank opens this year.

The role of sustained increase in investment is well recognised in the Scottish Government's Mission to raise investment in infrastructure. In 2018, the Scottish Government announced a National Infrastructure Mission to increase annual investment in infrastructure by 1% of 2017 Scottish GDP by 2025-26. This must be maintained as a key factor in recovery, with the Scottish and UK Governments collaborating on securing a significant increase in access to capital investment to support the recovery.

The challenge to deliver increased investment in response to the crisis will be an essential element of the economic recovery. The global response to the crisis recognises the importance of investment. For example, the EU Recovery Plan^[30] identifies the twin green and digital transitions, and the need to strengthen strategic autonomy while preserving the benefits of an open economy. In order to achieve these objectives, the importance of strategic public investment and more effective leverage of private investment into projects to provide public good could not be clearer.

Our departure from the EU means that Scotland will no longer have access to the EU Structural Funds supporting regional development and social investment. These measures played a vital role in the recovery after the 2008 global financial crisis. The UK Government has indicated its intentions to create a shared 'prosperity fund' to replace these funding streams, but has not yet set out its detailed plans. Its decisions will have a significant impact on the resources that the Scottish Government will be able to deploy.

We need an investment-led recovery in Scotland. The submission from the Scottish Futures Trust stressed the vital importance of infrastructure investment.

The Group has not taken a view on a single best mechanism to ensure capital investment is prioritised to support economic recovery. But it is clear that the Scottish Government should be able to access low-cost capital funding, and deploy it to maximum effect. This could be within the existing UK devolved framework, through an agreed extension of the Fiscal Framework or a combination of both.

Many commentators have already noted that with the cost of government borrowing at very low levels, it makes sense to look to long-term recovery investments which are funded through long-term borrowing. There may be scope to allocate some borrowing undertaken by the UK Government for the benefit of all four nations across the UK as the current Fiscal Framework is reviewed.

In addition, there will need to be an acceleration of private sector investment, often in partnership with the public sector. In Scotland, considerable work has been undertaken already on the formation of the Scottish National Investment Bank. The crisis accelerates the need for an investment institution at the heart of the Scottish economic landscape.

The initial priority for the Scottish National Investment Bank is of course to open this year, and its initial focus will be on investment towards its primary mission which is to support the transition to a net-zero society by 2040. Once established, the Bank will also become a major contributor to economic recovery through investment in place-based projects and innovation. The consultation has revealed the significant interest and appetite for co-investment with the Bank, including with universities, digital infrastructure providers and the third sector.

The Bank is being established as Scotland's primary public sector debt and equity investment institution. It will provide patient capital to projects and businesses that are both long-term and commercial and are aligned with the Bank's missions. The Bank's mission-oriented approach provides an innovative and strategic way in which the public sector can more effectively address Scotland's grand challenges, including the impacts from the pandemic. By crowding in investment, the Bank will be in a unique position to help deliver a robust and resilient wellbeing economy.

One of the main objectives outlined in the Implementation Plan^[31] which laid the basis for the Bank was to develop the ability to leverage initial public capital by issuing bonds - thereby increasing the amount of funds available for investment. The ability to leverage relatively small amounts of public capital, including its initial capital base, into a significant source of strategic and long-term finance is a key source of strength for development banks internationally. Under the original plan, this ability would not be activated for some time: the crisis has made it a more pressing priority, and it should be brought forward.

The impact of the crisis will refocus businesses' investment decisions, creating a new set of choices on the deployment of their capital. The Bank will be well placed to use its investment criteria to continue to support businesses and the third sector to pivot towards mission-oriented outcomes.

The Bank's mission-oriented approach will also respond to the disproportionate impact on particular places and income groups. The Bank will continue to show commitment and leadership, focusing investment in strategic opportunities across all of Scotland. This can, for example, help ensure that viable housing and infrastructure projects do not decline as a result of a lack of available capital. It can also include investment in the provision of education.

The Bank can also help play a critical and creative role in supporting community-led projects which impact on all of the Bank's missions. The Bank will invest in innovation and industries of the future. The pandemic has emphasised the opportunities which require patient capital support to unlock technology in response to public health challenges. There is early evidence that knowledge-based, technology-driven businesses continue to perform strongly, while there is the risk that productivity challenges which have persisted for generations will intensify.

Within this context, the Bank will look to accelerate its activity to ensure Scotland creates and internationalises innovation, and harnesses technology which helps address long-term demographic trends. By continuing to provide encouragement through the investment of patient capital, the Bank will play a prominent role in underpinning confidence in companies and entrepreneurs who seek to innovate.

5.3 Enterprise and regional economic development

The economic development landscape in Scotland should pivot to a more regionally focused model in order to address the specific new challenges of economic recovery. This model should be tasked to drive delivery of place-based and regional solutions, especially the City-Region Growth Deals.

Our national economic development system has grown organically over time with enterprise and skills bodies, local authorities, other agencies and the Scottish Government working across geographic and sectoral boundaries. Recent reforms, including the 2016 review of the enterprise and skills system, have improved alignment and enhanced coordination. The South of Scotland Economic Partnership was added to the enterprise system and a Strategic Board was formed, involving private sector representatives and the chairs and chief executives of the enterprise and skills bodies.

The crisis has served to accelerate the need for collaboration and the need for responses which are tailored to regional and sectoral needs. Scotland is not a big economy, but it is an economy of many parts; and geographical and sectorial differences need to be recognised, respected and championed. The new South of Scotland Enterprise and Highlands and Islands Enterprise already work at a regional basis, and a series of Regional Economic Partnerships are being implemented.

We see significant common ground in the responses received, which have argued for enhanced collaborative working at regional level. The key role played by local authorities was self-identified as undervalued and constrained by a lack of resources. The Scottish Futures Trust suggested that, alongside funding to support projects, there was an urgent need to support the capacity to deliver large and complex projects at pace. It suggested a national delivery capability, and there is much to learn from the Infrastructure and Projects Authority.^[32]

There is an opportunity now to acknowledge the severity of the recession and to accelerate reform and crack the longstanding, difficult problems of collaboration at pace. It is essential that there is a golden thread to link international, national, regional and local responses.

In that context, we believe that Scottish Enterprise should align resources more closely at regional level, while playing a leading role at international and national level in support of economic recovery.

This would have the benefit of strengthening and bolstering the capacity across the cities, local authorities and Regional Economic Partnerships, where significant resources are already directed at economic development. In addition, this will provide assurance that those regional projects and programmes that seek Scottish Government funding have a strategic fit with our national economic strategy. Recent investment in digital platforms for business support should be invested in and scaled-up to be meaningful and accessible to all.

The regions of Scotland already have partnerships in place: but they now need to reset their focus on recovery and use them to maximum effect. These Regional Economic Partnerships should be strengthened and bolstered to ensure the recommendations we make here take root.

In normal times, the reform of existing institutions has proven politically sensitive and difficult to implement. This crisis makes it urgent. Given the current environment, any changes should be made without passing any new legislation or making changes to staff terms and conditions.

The Scottish Government should drive forward further changes to the Scottish economic development landscape, especially the more regionally focused model. This would be designed to enhance the implementation of place-based and regional solutions, especially the City-Region Growth Deals.

5.4 Ownership stakes in companies

The Scottish Government should build its professional capability to manage ownership stakes in private businesses, which are likely to arise out of the crisis. This should not require new legislation, nor a new public sector organisation.

The experience of the development of the Scottish National Investment Bank, and the Scottish Government's recent experience with taking on ownership of Prestwick Airport and Ferguson Marine has led to consideration of whether a Scottish equivalent of United Kingdom Government Investments (UKGI) should be considered.

UKGI is the UK Government's centre for expertise, acting as shareholder for, and leading the establishment of, the UK Government's arm's length bodies. UKGI has evolved to perform an increasingly important role overseeing publicly held companies, advising the UK Government on corporate finance and restructuring and managing corporate activity such as share sales. There is no equivalent function within the Scottish Government.

In terms of international experience, Temasek in Singapore has now invested widely and at a very large scale. It is run independently of government to ensure it operates commercially and that its investments compete on a level playing field. Temasek issues its own debt instruments in support of its investment programme.

There is a strong case for having a dedicated, specialist expertise to manage any expanding ownership role on behalf of the Scottish Government. This need not require a new organisation at this stage. There is significant benefit to be gained by recruiting specialist financial expertise, covering corporate finance, asset management and governance, together with specific sector specialism. Alternatively, the necessary expertise could be acquired through secondments from the private sector.

However it is resourced, the remit for the shareholder role of government should be clear, and it should operate to achieve its remit independently while reporting to Ministers who are then accountable to Parliament.

5.5 Strategic support for businesses

Banks should develop new instruments to enable the strategic incubation of otherwise viable and strategically important companies to ensure they are protected during the recovery phase. The Scottish Government should use its convening power to co-ordinate approaches to different sectors of the economy, in close liaison with financial services institutions, sectoral organisations and the enterprise bodies.

While there is likely to be a need for the Scottish Government to take on some ownership stakes, it should not seek to play roles more suited to the private sector. The various government schemes have provided loans to businesses to maintain productive capacity and avoid redundancies. However, these measures leave businesses with higher indebtedness. A continual supply of credit from the banks will be key to supporting businesses through the recovery phase.

Over time this current phase of universal forbearance will come to a close, but this may be for an extended period for some industries. Banks should focus on supporting businesses with good longer-term prospects of survival in sectors which will be important for Scotland's future economy. The transition of government support for businesses over the coming months will raise complex and difficult issues. Complex judgements will be required on the timing of the winding-down of the current schemes, and focussed and specific support will be required for sectors most severely affected over a longer timeframe.

Banks, including the British Business Bank, and other financial services institutions should work closely with the Scottish Government on the development of instruments and frameworks to enable the thoughtful strategic forbearance and incubation of otherwise viable and strategically important companies to ensure they are protected during the recovery phase.

The Scottish Government should use its convening power to co-ordinate approaches to different sectors of the economy which are important for Scotland, in close liaison with financial services institutions, sectoral institutions and the enterprise bodies.

Alongside the scaling-up of the Scottish National Investment Bank, Scottish Enterprise will maintain key parts of its current investment functions over the immediate recovery period. It will continue to provide debt-based support and equity co-investment for sub-£2 million investments in businesses in Scotland, including the current activities of the Scottish Investment Bank.

This is a critical and crucial role, which should pivot to reflect the needs of Scotland's viable and strategically important companies. This of course includes early stage and growth companies, which have the prospect of making a vital contribution in future. This will require a clear and targeted investment strategy in support of Scotland's small and medium-sized enterprises (SMEs) in the medium term.

It will be important to provide support to entrepreneurs and businesses in Scotland to innovate and seek new markets. There is substantial support already available, as well as new schemes which are being introduced in response to the crisis. But new sector-specific banking products and differentiated solutions such as restart loans, new deals, repayment plans will be required. This should be brought together as a focused SME recovery capability, as part of any transition of activities to the Scottish National Investment Bank.

This combination of active collaboration between the UK Government, Scottish Government, the Bank and the enterprise bodies is essential to ensure the extensive support for business in Scotland that has been put in place is tapered in a way that will enable businesses to restart and recover.

5.6 Foreign Direct Investment

The Scottish Government, Scottish Enterprise and VisitScotland must ensure a strong and bold prospectus on Scotland and on available investment opportunities, recognising the substantial, twin shocks of the pandemic and leaving the European Union. This will require a focus on opportunity areas and deployment of its international presence to maximum effect.

A robust and resilient wellbeing economy needs to be outward looking and competitive. Attracting businesses to invest in Scotland, and in turn stimulating trade in international markets, retains a critical role in shaping Scotland's economy of the future. Attracting talent and ideas from overseas, that can mix with our indigenous businesses, can deliver mutual benefit. And bringing additional financial capital to Scotland will be increasingly important as a contribution to deliver investment-led growth.

The context for our international engagement is, however, changing. The analysis commissioned for the Group from David Skilling and summarised in section 2.5 sets this out in detail. We face the prospect of new barriers to trade. These may result from a reassessment of the trends in globalisation we have seen for some years. Striking the right balance between resilience in the supply of goods and services (what the EU have called 'strategic autonomy') and openness to trade will be a key challenge. And steps which many countries are likely to take to achieve greater resilience in supply may add to the uncertainty that exists around international markets.

In addition we face the prospect of dislocation of trade and our international relationships with the UK Government decision to leave the EU, and apparently to decide against any proposal to extend the implementation period beyond the end of this year. This increases significantly the shock facing the Scottish economy.

We do not see a conflict between openness to trade and a robust and resilient wellbeing economy. A retreat into protectionism is not the way to secure our economic future. But greater care and attention to the balance between reliance on trade to provide essential products and what can be secured domestically is required.

Yet the changing context for international trade, will impact on our potential to export and our scope to bring in inward investment. A bold Prospectus for Scotland should be based on a revised assessment of the sectors where Scotland has a competitive advantage. This assessment should take account of the differential impact on sectors of the end of the implementation period, especially with a WTO-style trade outcome.

Notwithstanding the prospect of considerable trade uncertainty, there is scope to gear-up our internationalisation agenda as a powerful mechanism for recovery. This agenda can help realise the undoubted and substantial opportunities that exist in global markets, which are changing with a centre of gravity that continues to shift East. There are sectors where we have very real advantage, such as in natural capital that can be leveraged through our emerging tech, advanced manufacturing and low-carbon innovation talent and assets.

Scotland should not be shy about taking its place in the world - its economy is globally integrated with a large base of international investors and strong exports. It should speak openly of itself as a progressive economy that strongly values working with other nations.

In order to differentiate itself in a crowded and competitive marketplace, Scotland needs to demonstrate those values in action:

• By galvanising its international efforts around key areas where it has real strengths, and can make a difference to solving complex global issues;
• By proactively seeking out inward investors who share our vision of the future. Scottish Enterprise have identified nine opportunity areas with strong inward investment flows and the opportunity for further growth, which map to Scotland's strengths; and
• By delivering a market focus, with effective deployment of resources in world markets.

The Scottish Government and Scottish Enterprise must ensure priority on its internationalisation agenda, to leverage private/foreign investment to recapitalise and develop green and investment-ready sectors.

5.7 Relationship with the Business Community

The Scottish Government and the business community should take urgent action to develop a new collaborative partnership on the strategy for Scotland's economic recovery.

The economy can only thrive if there are successful and supportive relationships between business and government. This is all the more vital in difficult and challenging times. Now is the time to embark on the deep and sustained partnership that will attract the right kind of partners and investors to Scotland in recovery. A dynamic 'Team Scotland' effort is required, involving a broad collaboration between policy officials, regulators, funders, higher and further education, innovation centres and the private and third sectors.

There are a number of fora in which business leaders currently come together with the Scottish Government to discuss strategic issues, in particular the Industry Leadership Groups. We welcome the fact that Nora Senior, Chair of the Enterprise and Skills Strategic Board, is currently conducting a review of the functioning of these groups. But we think that more is required.

Although the picture is variable, the feedback for some sectors and some parts of the business community is that relationships and dialogue need to be improved. And it is striking that there is no single strategic forum that brings together the leadership of the Scottish Government and the leadership of Scottish business.

At a time when government will of necessity hold much greater stakes in Scottish businesses big and small, and when the future path is so uncertain, we think that there is a pressing need for a reset.

This could involve action at different levels:

• There is a strong case for seconding business expertise to the Scottish Government, to work on specific projects where private sector knowledge can supplement policy skills. One specific example could be in managing the Scottish Government's function as a shareholder, as we propose above. Over time, such a process, which could also involve secondments the other way, would build stronger understanding and relationships across the board;
• The Singaporean government, which has established an 'Emerging Stronger Task Force' of senior business leaders, co-chaired by a Minister, to advise on the recovery, reporting in to its Future Economy Council, chaired by the Singaporean Deputy Prime Minister;
• Others have suggested setting up a small, time-bound group to inject energy into a sales-led recovery and kick-start the conversation between business and government around the prospectus for Scotland that we have described earlier in this report;
• The Scottish Government should consider establishing a top-level Council of Business Advisers to work alongside its Council of Economic Advisers in helping Ministers to map out Scotland's future strategy in partnership.

But the precise form and structures of a new partnership are not an end in themselves. The key thing is that business and government have a shared imperative and opportunity to work together - involving other parties too - to deliver the kind of recovery that Scotland needs.

5.8 Planning and regulation

The Scottish Government, regulatory bodies and local authorities should review their key policy, planning and consenting frameworks, especially for key infrastructure investments such as marine renewables, to accelerate projects.

Scotland has high-quality regulatory standards that are essential to underpin inclusive, lasting and green economic recovery. The Scottish Government, its agencies and planning authorities should ensure that they are administered through processes that are efficient, flexible and outcome-focussed. A focus on improving regulation is a call for accelerating good processes, not for lowering standards. This should lead to improvements which can accelerate due processes in order to deliver on economic recovery. Scotland is making some progress on this: but it can go further, through the provision of clear strategic direction and an enabling approach.

Public agencies of all kinds showed great pace, flexibility and innovation in decision-making during the crisis. Now, as Scotland resets and restarts, we see opportunities to learn from that experience to promote more agile approaches across the public sector, There is significant scope to develop enhanced capacity in the Scottish Government to ensure that necessary and desirable regulatory processes are implemented at pace and with due process. A key lesson from the crisis is that government capacity is a key factor in supporting business success.^[33]

We were struck by the example of the approach taken to regulation in the forestry sector, where a 2016 review of the regulation associated with approving forest creation projects led to a streamlined process, with faster decision-making saving money, time and increasing confidence for investors as well as more trees being planted.

The ability of the aquaculture sector to operate, innovate and grow is dependent on how the public sector engages with industry. Regulation itself has clear benefits for Scottish aquaculture - helping protect quality, standards and reputation - but the industry has regularly asked for more timely and transparent approaches to regulation and enforcement.

The public sector's rapid adoption of new ways of working and regulating during lockdown has shown that change, pivoting direction and fleetness of foot are very possible. Scotland, as a small nation with short lines of communication, is also well positioned to switch to more agile approaches to innovation, policymaking and regulation.

A number of regulatory agencies and planning authorities are testing new ways of becoming active drivers of business and community innovation, investment and jobs. For example, the Scottish Environment Protection Agency (SEPA) has created a formal, active partnership model of Sustainable Growth Agreements, and a new Regulatory Practitioners' Network is being established jointly by SEPA and Food Standards Scotland to support discussion of new models and approaches across different sectoral interests. These efforts need to be accelerated.

One of the most critical areas for strategic focus in the context of a green recovery and climate change, however, is the marine renewables sector. Scotland has some of the most ambitious climate change targets in the world. Central to the Scottish Government's response, and a key component in the transition to a low-carbon economy in Scotland, is the development of offshore wind energy. With huge wind resources and a marine area six times the size of Scotland's land mass, offshore wind offers considerable potential for sustainable economic growth. Scotland can and should be a leader in marine renewables.

To date, the realisation of offshore wind projects in the journey from their initial concept at a strategic planning level, through the consenting and licensing systems and ultimately on to construction, has taken around a decade. The pace of development in recent years has not matched earlier ambitions. And the regulatory process has itself been the subject of challenge, reflecting in part the complex and sensitive nature of the potentially conflicting interests, whether environmental or economic, which are engaged whenever large-scale developments of this kind are proposed.

There is a need now to considerably increase the pace and scale of deployment to meet low-carbon generating targets over the next 25 years, and to enable Scotland to grasp the tremendous opportunities for a green recovery which such a transition offers. This imperative presents increased and urgent challenges for the existing policy, planning and licensing framework to identify and consent suitable projects with a sufficient level of impact in the light of the climate change emergency at a scale and to a timetable to deliver on Scotland's net zero targets.

Against that background, the Scottish and UK Governments should review the existing framework to ensure they are fit for the purpose; and ensure that we can protect the rich natural resource of Scotland's biodiversity, while enabling the deployment of offshore wind to meet the challenges of the climate emergency.

5.9 Conditionality

The Scottish Government should deploy its expanding tax powers and business support interventions to enable economic recovery. This should include targeted use of rates relief to incentivise economic recovery and greater use of conditionality in business support, building on the experience of the Business Pledge and Fair Work First.

The Review^[34] into Tax Rates for Non-Domestic Properties in Scotland undertaken by Ken Barclay in 2017 has been implemented with significant use of rates relief to promote business growth. And the non-domestic rates system has supported businesses through the crisis, with rates relief of 1.6% for all non-domestic properties in 2020-21, and 100% rates relief for all non-domestic properties in the retail, hospitality, leisure and aviation sectors.

This has been an effective mechanism to provide immediate, broadly-based support to business. But it is a blunt instrument. Over the coming months, it will be necessary to deploy more targeted, continuing support in specific areas, and to specific sectors, as part of recovery plans. That is one reason why, as we have said above, we think there is a case for Scotland to have greater autonomy over fiscal measures.

The Scottish Government has been developing forms of conditionality in its business support. The Fair Work Action Plan,^[35] published in February 2019, sets out that by the end of this Parliament, wherever it is appropriate to do so, the Scottish Government will extend Fair Work criteria to every type of grant, funding stream and business support budget open to us, and extend the range of Scottish Government and public sector contracts to which the Fair Work criteria will apply.

The approach is a positive encouragement to apply good practice. For example, it includes "genuine workforce engagement, such as trade union recognition" as one of five key criteria. The Scottish Government's Fair Work First approach asks employers to commit to working towards it. This approach encourages and rewards employers rather than penalising them. Fair Work First asks employers to commit to: investment in skills and training; no inappropriate use of zero hours contracts (for example using zero hours contracts when people are working regular hours; or exclusive contracts that stop flexible workers working for other people); action to tackle the gender pay gap; genuine workforce engagement such as trade union recognition; and payment of the real Living Wage.

The application of the Fair Work First approach to the award of business support grants has been phased in by the enterprise bodies and the Scottish Government, and the Scottish National Investment Bank will align its activities with the the approach.

There is also the potential to use conditionality more broadly. Many countries are developing wider approaches. In New Zealand, the Provincial Growth Fund^[36] is channelling loans into regional projects, such as water storage, horticulture development on under-utilised land and riverfront revitalisation. It includes conditions on ongoing payments of the loans subject to reaching key milestones - public benefits such as contribution to regional growth, job creation, skills development and improving environmental, cultural and social indicators.

The European Commission recognised the option of applying conditionality alongside projects approved under State aid rules. This could include applying green conditions to companies to promote the transition to net-zero emissions. There is active consideration of this approach in many EU countries.^[37]

While the use of conditions in the allocation of grants and loans should be pursued actively, this approach requires careful application of enforceable criteria. And the conditions applied need to avoid any unintended consequences in terms of shifting emissions or activity abroad. Yet, as an approach, it merits active development.

5.10 Digital Infrastructure

The UK and Scottish Governments should mobilise investment in Scotland's digital infrastructure, covering broadband and mobile networks, to build resilience and enhance exports.

Digital connectivity is an essential enabler of growth, productivity and inclusion. The crisis has confirmed the foundational importance of digital technologies in all aspects of our lives, and enhanced investment will likewise be a foundation of economic recovery and a robust and resilient wellbeing economy.

The behavioural changes brought about by the crisis - and specifically the move to flexible and remote working - are crucially dependent on the provision of digital services.

The crisis has required many people to work from home, which has accelerated a significant structural change in our economy, although we are conscious that for many people, home-working is not possible. The change is likely to stick, as behavioural attitudes have made home-working more effective and more widely accepted. This has also placed an increased reliance on online public service delivery and brought into even sharper focus the need for greater digital inclusion. Retaining this change and accelerating the trend toward home-working and online delivery of public services can make a significant contribution to the country's economic competitiveness.

Experience during the crisis has shown our dependence on digital connectivity - for work, for the provision of services, for social and community connection, and for wellbeing. In recovery, we should treat digital connectivity as critical national infrastructure, and give higher priority to improving it.

For example, there are currently no landing cables in Scotland, other than older cable systems running between Scotland and Northern Ireland. This is a major deficit for Scotland's infrastructure: we only need look at Ireland, for a case study of how to do it properly. Its investment in subsea cabling has allowed it to become part of the gateway to the United States, as well as continental Europe. The resulting capacity, diversity and resilience for connectivity have attracted substantial inward investment from US corporations wanting a European footprint.

Virtually all of Scotland's internet traffic transits via London. Scotland is today the only European country which does not have multiple independent routes to the main nodes of the internet in Europe. It is heavily dependent on the London-Amsterdam corridor.

Scotland is significantly behind in terms of data centre market size and the amount of digital infrastructure to support it. Scotland has 2.2 MW of data centre capacity per million people. Wales has 32 MW per million.

The net benefit of developing this infrastructure will enable the establishment of data centres, which is a requirement for the full rollout of 5G, autonomous cars or surgical robotics within hospitals outside of major cities.

The delivery of new fibre infrastructure will be central to improving digital connectivity across Scotland. The Scottish Government's R100 project will see new fibre deployed across rural Scotland in the coming years, enabling access to superfast broadband, and increasingly full fibre, services and providing a backbone that other digital services can utilise. The project has the potential both to enhance economic output and reduce Scotland's carbon footprint, as it enables greater diversity and inclusion in geographical economic contribution. It needs to be accelerated.

The Scottish Government can also use its wider policy responsibilities to enable and stimulate improved connectivity. This could include utilisation of non-domestic rates powers to stimulate investment, with a fibre rates reduction. There is currently a 10-year rates holiday in place for new digital infrastructure. Scotland should lean in to this and offer the same rates holiday for all digital infrastructure in rural areas. This would lead to greater deployment of infrastructure spending in Scotland, with firms using UK funding to capitalise on the benefit of investing in Scotland. We should aim to make Scotland more attractive than the rest of the UK.

For mobile connectivity, Scotland is lagging behind the rest of the UK. The Scottish Government is funding a number of new masts through its Scottish 4G Infill Programme and the UK Government is investing £500 million into rural infrastructure to significantly improve "not-spots" and "partial not-spots". Accelerating this activity, and exploiting the links between the two programmes, would be a real strategic opportunity for Scotland, especially as there are three major obstacles to mobile infrastructure - cost of access, cost of connection and business rates, which are extremely high for rural digital infrastructure.

There is also a real opportunity to enhance local distribution power networks and civil works. At the moment, there are regulatory obstacles set by Ofgem which limit Scottish Power's and SSE's ability to invest in improving the energy grid. Scotland should press for changes to planning rules to enable faster development. This would also have the benefit of allowing faster rollout of electric vehicles across Scotland.

Ensuring widespread access to connectivity will also enable further innovation in public service delivery - with services designed around people not structures, and able to operate securely and flexibly across organisational boundaries. This will require common operating platforms, greater interoperability and a systematic approach to addressing barriers to digital inclusion, including affordability, skills and access to devices.

The UK and Scottish Governments should collaborate to scale up and accelerate planned investment in Scotland's digital infrastructure.

This should include action to further promote investment in broadband networks, where there is potential to join up elements of the UK Government's planned £5 billion investment in full fibre with the Scottish Government's £600 million R100 broadband programme; and in mobile networks, where the recently announced UK-wide Shared Rural Network could dovetail effectively with the Scottish 4G Infill Programme. Opportunities to enhance Scotland's international fibre connections and datacentre capacity should also be explored; and the extended use of connection vouchers as a means of getting investment into the system without lengthy new procurements should be considered.

But investing in our digital infrastructure, while essential for our recovery and resilience, is not enough on its own. It must be accompanied by action to tackle digital poverty, by helping those who do not have access to the internet, do not have digital devices or do not have the skills to use them. The Scottish Council for Voluntary Organisations^[38] estimates that nearly one in five adults in Scotland do not have the skills to make full use of digital technology at home or at work; while one in 10, particularly older people, have no digital skills at all.

The Scottish Government has recently announced targeted measures to help the most vulnerable elderly people acquire such skills over coming months: these efforts need to be maintained and accelerated in the recovery phase, as part of building resilience.

5.11 Prioritisation and delivery of green investments

The green economic recovery is central to recovery overall. The Scottish Government now needs to establish a priority on delivering transformational change with clear sector plans, where the coincidence of emissions reductions, the development of natural capital and job creation is the strongest.

The task of mitigating our contribution to climate change is a generational challenge. Transformational change is required and the policy response to Covid-19 has shown us what rapid, radical change feels like and the sort of energy and focus that it requires. Responding to climate change needs to be a thread through every policy action.

This should be the key task of the Scottish Government's forthcoming Infrastructure Investment Plan and the update to Climate Change Plan. These Plans should set out the role for our primary industries and investments to deliver net-zero emissions and the interrelated and necessary improvements in our natural capital.

Building on the work of the Infrastructure Commission for Scotland and the Just Transition Commission, they should cover detailed plans for green transport infrastructure, carbon capture and storage, energy generation and storage, hydrogen, heat decarbonisation, land use and the promotion and embedding of the circular economy and positive behavioural change. As businesses rethink their business models following the crisis, there is a real opportunity to use circular economy principles to promote new ways of reducing our use of scarce natural resources.

The Group strongly endorses the six principles for a resilient recovery set out by the Committee on Climate Change. These principles are entirely consistent with the approach taken here. The principles are:

1. Use climate investments to support the economic recovery and jobs;

2. Lead a shift towards positive long-term behaviours;

3. Tackle the wider 'resilience deficit' on climate change;

4. Embed fairness as a core principle;

5. Ensure the recovery does not 'lock-in' greenhouse gas emissions or increased climate risk;

6. Strengthen incentives to reduce emissions when considering fiscal changes.

Our consultation brought forward a detailed, rich and wide-ranging set of proposals for green investment. This level of engagement and commitment needs to be mobilised into the successful delivery of a wide range of projects, large and small, and behaviour change.

One of the particular challenges during the economic recovery will be the medium- and long-term behaviours toward transport choices. The submission from Professor Iain Docherty noted that the single most important intervention for a green recovery is to manage the rebound effect in the demand for car travel. During the crisis, car use has fallen, and use of other transport options, especially cycling and walking, has increased sharply. There is considerable scope for the trend toward remote working to be normalised and maintained. Yet there is a potential for a significant rebound effect with increased car use and reduced confidence in public transport for some time.

Taking carbon out of our economy and out of our lifestyles will require sustained investment and the creation of new jobs, industries and supply chains. And we must do this in a way which ensures that global emissions are reduced, not simply relocated. This is a potential unintended consequence of Scotland's net-zero target which is based on territorial emissions, and there is a case for having a more explicit focus on consumption-based emissions (e.g. carbon footprint). This could be in the form of new or additional targets, or a greater role for those consumption-based measures in government decision-making and could provide an opportunity to embed the principles of a circular economy within government.

Non-traded sectors and activities which are less affected by international competitiveness concerns such as domestic heating, energy efficiency and ground transport are all ripe for a programme of investment and innovation which will deliver emissions reductions, jobs and potential opportunities in supply chain development.

There is also now an opportunity for Scotland to lever some of its natural advantages: the almost limitless quantities of renewable energy potential from wind, wave and tidal power can be used to generate electricity surpluses to export to the rest of the UK and elsewhere and to generate 'green' hydrogen to use in the heat and transport sectors; the geology of the North Sea in combination with the pre-existing pipeline infrastructure leaves Scotland almost uniquely placed to become a centre for the transport and storage of carbon captured from combustion processes; and the prioritisation of nature-based solutions can build on the natural environment as a key part of Scotland's brand and comparative advantage to the benefit of tourism and other sectors.

5.12 Investment in natural capital

The financial services sector and the Scottish Government should develop and promote nature-based investments to protect and enhance Scotland's natural capital. This should include the development of financial solutions to fund forestry and other nature-based solutions, including agriculture, and should be accompanied by the development of a Scottish Natural Capital Census.

Our approach to natural capital should be founded on the goal that each generation should leave its successor a set of natural assets at least as good as those that they inherited, so that future generations can choose how to live their lives and the economy has natural infrastructure to support it. The degradation of our environment and the overuse and misuse of the natural world has contributed to climate change and a loss of biodiversity. This has caused multiple harms which diminish our wellbeing, reduce the opportunities of future generations and constrain our economic capacity and productivity over the long run.

Scotland has outstanding natural assets, which are at the heart of who we are. They represent an area of significant comparative advantage for the country. The industries underpinned by Scotland's natural capital will therefore have an essential role to play in supporting economic recovery.

A number of submissions argued that a greater integration of natural capital approach into policymaking can help establish policies to improve resilience to external shocks, as well as generating opportunities for economic recovery and inclusive, sustainable growth. Measures to support natural capital are essential to the future of land-based industries including agriculture as well as the tourism and hospitality sectors. They can form a key part of the Scottish brand. Much of Scotland's natural capital is in the land and the key to unlocking the necessary improvements to a whole range of natural assets lies in how that land is managed. There is a need now to prioritise nature-based solutions such as peatland restoration and afforestation which support multiple objectives including climate mitigation, flood protection and biodiversity enhancement while at the same time boosting the rural, tourism and nature-based economies. Now is the time for fresh approaches which can be tested and piloted, building for a future beyond the 'Stability and Simplicity' framework enabling Scottish agriculture to adapt to a world after the Common Agricultural Policy.

An intensification of activities to restore and rebuild Scotland's natural assets should be informed by a full and comprehensive Scottish Natural Capital Census. We need to ensure that any demands for so-called 'shovel-ready' projects to support jobs and recovery are tempered by proper consideration of the long-run implications, good and bad, for the natural infrastructure which sustains the whole economy.

But it is challenging to monitor and measure the safeguarding of these assets without a strong measurement framework. We should build on the experimental natural accounts prepared by the Office of National Statistics for the Scottish Government^[39] as a measure of the initial balance sheet, and it should be extended with a broader definition of the natural economy. This framework for natural accounts can guide the underlying health of this natural balance sheet, as well as the annual flow of economic gains derived from it. Such economic gains would include the restoration of peatland and the promotion of forestry, the promotion of biodiversity and methods of funding nature-based solutions that enable us to enhance our natural capital and reduce net emissions.

5.13 Tourism and hospitality

The tourism and hospitality industries should work in partnership with the Scottish Government to develop a sustainable future strategy; the Scottish Government should consider a targeted reduction in business rates to support the sectors' recovery; and it should press the UK Government to consider a reduction in VAT.

Scotland's tourism sector makes a major contribution to Scotland's finances. Visitor spending in 2019 supported some £7 billion, or 5% of Scottish GDP - and the sector employs around 218,000 people, making up 8% of Scotland's workforce. Over half of them are women; 40% of them are young people; and half of the workforce is employed in small and medium-sized companies, particularly in rural and island communities.

Tourism and hospitality are vitally important to our economy. And they are a key dimension of 'brand Scotland' - we welcomed 3.5 million visitors in 2018. So they are systemically important sectors, which have to be at the heart of the future national prospectus for Scotland.

The sectors have been hit particularly hard by the crisis, and will struggle to recover quickly. It is vital that they do. Many of the interventions we recommend elsewhere in our report - on bank finance, on a regional approach to business support, on digital infrastructure, on support for skills, on inward investment - will be of particular benefit for tourism and hospitality too.

But we think that further, specific action is also needed. We were pleased to see that the Scottish Government has set up an industry taskforce to look at options for the future of tourism. We hope that, working in partnership, it will be able to set out a more robust and sustainable vision for the sector going forwards; and that it will look specifically at new, longer-term investment models and ways to grow and support local talent.

As a result of the serious financial impact on the interrelated tourism, events and hospitality sectors, there may be a need to develop specific solutions for these sectors, in line with our recommendations elsewhere in this report on ownership stakes.

There are a wide range of ownership models for tourism and culture facilities at present, covering private and public ownership, and national and local government. Glasgow Life, the Glasgow City Council arm's-length company responsible for managing the city's main cultural and sporting assets has expressed interest in a new more mixed partnership approach to the cost of managing national assets. And international experience may be valuable, for example the state-owned 'Parador' hotel model in Spain.

But given the strategic significance of the sectors to Scotland, the impact of the crisis, and the importance of the tourism sector in particular for employment around the country, especially in rural communities, we think that there is a strong case to go further, and to look at fiscal measures to protect and progress it. We think that the Scottish Government should consider a targeted reduction in business rates for tourism establishments; and should press the UK Government to consider targeted and temporary reduction in VAT to support the sector's recovery.

5.14 Creative Sector

Given the significant contribution of the arts, culture and creative industries to Scotland's economy and to our social capital, the Scottish Government should take steps to protect the sector; seek to increase public and private investment; and work to create a National Arts Force.

The arts, culture and creative industries make an important and growing contribution to Scotland's economic and social capital. They create high quality, fulfilling jobs, which can be amplified through specialist apprenticeships, skills development and training. And they play an important role in Scotland's international offering as part of 'Brand Scotland'.

With this in mind, we invited specific input from a group of key leaders from across the sector. We are publishing their paper for the Group alongside our report.

The sector has been hit disproportionately hard by the crisis as a consequence of physical distancing requirements. Many parts of the sector are hampered by physical infrastructure - often of significant heritage value - which will be particularly difficult to adapt to new requirements. This will call existing business models into question.

A significant proportion of the workforce are either freelance or gig economy workers, who will struggle to find or maintain jobs in the post-crisis period. Yet the sector can play a big part in our recovery, attracting visitors and investment alike once the present restrictions are lifted, and helping to build both confidence and resilience for the future.

The sector is inherently innovative and entrepreneurial, and can be integrated into recovery and development work right across the economy, with particular emphasis on health, education (including blended learning), tourism, leisure and overall wellbeing.

Against that background, the sector should be given high priority in Scotland's recovery plan. Scotland must emerge from the crisis with purpose, humanity and resilience. We must look after our cultural heritage and create an enabled, inclusive society to build the heritage of the future.

There are a number of dimensions to a strategy for supporting the recovery and future flourishing of the sector. But as a priority, the Scottish Government should:

• Support the sector to protect and adapt strategically important physical cultural infrastructure, with a strong link to apprenticeships in the construction and specialist industries to help develop new skills;
• Seek ways to increase public and private investment across the sector to allow it to recover and compete; and
• Work with the sector to create a National Arts Force, composed of freelance and gig economy workers across the sector, to work in schools, care homes and communities.

5.15 Care Sector

The Scottish Government should accelerate its work on reforming adult social care; and should urgently review the structure, funding and regulation of the sector to ensure its sustainability and quality going forward. The review should address workforce issues, including the Fair Work Convention's 2019 report on the sector; and should recognise and support the contribution of unpaid carers.

Care homes are not just a key part of our social and health care system: they are a key part of Scotland's economy. Scotland's social care sector employs 200,000 people, 80% in the private and third sector, and has a financial value to the Scottish economy of over £3 billion. But care is not only a vital contributor and support to the economy: much more than that, good quality, safe, supportive and effective care is essential to our society.

Before the crisis, the sector was confronted by major challenges in relation to procurement of services from public authorities; to the recruitment, retention and pay of its workforce; and to the longer-term sustainability of its funding, and indeed its entire business model.

The crisis has only sharpened the nature of these challenges: but it has also brought home to us how precious a function the care sector provides for us all. Care homes in particular have truly been at the front line in the crisis; we must make sure that, as we come out of the immediate emergency, Scotland takes action to strengthen the capacity and sustainability of the care sector as a whole.

5.16 Third Sector

The Scottish Government should take action to protect the capacity and financial sustainability of the third sector, in recognition of its important role in building and strengthening social capital. It should examine the scope for longer-term funding arrangements for services; more flexible and collaborative approaches to procurement; and new ways to incentivise private investment in the sector.

The third sector provides a central component of Scotland's social capital. The activities and services it provides and supports have been of critical importance in maintaining a level of community resilience during the crisis. They will be just as important in the period of economic recovery, supporting young people, employability, health and wellbeing.

During the period of lockdown the sector has not been able to raise income from trading, fund-raising and investment, so its already thin financial reserves are perilously tight. Looking ahead, the coming recession will certainly increase the demand for the services that the sector provides, while the likely squeeze on public spending following the current large-scale emergency government expenditure will reduce the state's ability to meet needs, and also reduce the funds flowing to the sector.

Given the risks, it seems clear that if a different approach to the sector is not built into Scotland's recovery plans, it will not be able to carry on as it has in the past. Without support and investment, it might not survive. So we think that it is essential to put the third sector at the heart of planning for recovery and renewal, recognising its critical contribution to the goal of a wellbeing economy in Scotland.

As an immediate first step, we were pleased to see the Scottish Government's announcement of a £25 million Third Sector Resilience Fund to address the short-term emergency. But action on a larger scale and a wider front is needed to secure the future.

5.17 People, place and community

The Scottish Government should support a renewed focus on place-based initiatives, building on lessons learned from initiatives on Community Wealth-Building. It should also accelerate investment in housing, in particular through the Scottish National Investment Bank.

The analysis that we have undertaken and the evidence that we have heard underline the importance of 'place' as a key factor in Scotland's economic performance, and also in the strengthening of our social capital; and, as a consequence, of the importance of place-based interventions. This is already embedded in the Scottish Government's wider policy framework through the Local Economic Partnerships and the City Deals, and is supported by Scotland's Centre for Regional Inclusive Growth: but we think that it should play a more important part in economic recovery and in future policy.

The Scottish Government should support a renewed focus on place-based initiatives, working with Regional Economic Partnerships, City Deal teams and local authorities. This work should explore how local business can be incentivised and encouraged to provide finance and support for Community Wealth-Building.

Housing is central to the Scottish economy and to our wellbeing. The construction sector is a major source of employment, and makes an important contribution to Scotland's GDP. In normal times, investment in social housing alone by the public and private sector runs at over £3 billion a year. But more important than its direct impact on jobs and finances, everyone in Scotland should have a home that is warm, affordable and accessible. And support for housing is vital to help our most disadvantaged communities and create sustainable, attractive places.

Scotland faces a number of structural challenges, including caring for our ageing population and tackling homelessness, which have only been exacerbated by the crisis. Investment in housing has an important part to play in supporting Scotland's recovery, in supporting jobs, creating confidence and contributing to both social policy and climate change goals.

The Scottish Government should develop mechanisms to accelerate investment in housing, and in particular affordable housing, in rural as well as urban areas, using its policy and funding interventions to leverage private finance wherever possible. The Scottish National Investment Bank should play an important role in this effort, under its mission-oriented approach.

We received a number of responses to our call for views that relate to the idea of a Universal or Citizens Basic Income (CBI) or related concepts. We have also seen the recent report of the independent CBI Feasibility Study Steering Group which has been exploring the scope for piloting CBI in Scotland, and in particular, the ethical, legislative, financial and practical implications.

The key conclusion of the report is that while a pilot is desirable and worth exploring further, it must be done with the agreement, co-operation, and collaboration of all relevant parties, particularly the UK Government.

In the recovery phase, our priority must be to recover the jobs that are likely to be lost as a result of the pandemic. So while we understand the arguments in favour, we do not think that now is the time to prioritise a universal basic income.

5.18 Learning Loss

The Scottish Government and local authorities should assess the impact of any learning loss and ensure that pupils are fully supported as schools return, in order to mitigate the risk of reduced educational attainment, particularly among disadvantaged groups.

The early years of a child's life are pivotal for their development. Investment in children during this time is particularly valuable, in terms of improving both their cognitive and their non-cognitive skills.

Conversely, the negative impact from a lack of face-to-face school provision is likely to be particularly large for children in the early years and primary school.

Skills beget skills, as shown by the Nobel Prize winning work of James Heckman. So children who fall behind at school will struggle to catch up without intervention.^[40]

And such learning loss will be compounded for socio-economically disadvantaged students. Household income and family environment are major determinants of children's academic achievement in normal circumstances. Parents who are more educated and have more resources (money, time) invest more in their children in normal times. This is proving to be true during this pandemic. This will mean the socio-economic gap in educational achievement widens without intervention.

This long-term skill loss has major economic implications. If this generation of students leaves the education system with lower levels of skill and less human capital, this will negatively impact on their productivity and increase the skills shortages that firms report.

Research evidence suggest that a loss of a period of schooling can lead to substantial loss of educational development, which in turn can lead to poorer employment and life outcomes. There is clear evidence, too, of the disproportionate impact of learning loss on disadvantaged children and young people. Research^[41] shows that while young people appear to be less affected by the virus, they are more vulnerable educationally and in terms of their long-term employment prospects, exacerbating the already considerable inter- and intra-generational inequalities in educational attainment in Scotland and the UK.

Overall, the learning loss that has been caused by the crisis will, if not addressed urgently, lead inevitably to long-term damage to our economy and more importantly to the prospects of a generation of children. So it is vital that action to tackle it starts now.

Over the coming months, we expect schools to identify the group of pupils who have fallen furthest behind in lockdown. It is likely that this group will map closely to children from disadvantaged families. Then schools will need to take targeted and urgent action to help these children to catch up, over and above the efforts for all children.

This will inevitably require extra resource in qualified teachers (or teaching time). So it will be essential for schools, local authorities and the Scottish Government to assess and address the financial implications of the additional efforts that will be required.

The challenge of learning loss arising from the crisis is one that is common to many, if not all, countries as they emerge from the immediate emergency. So it is important that the action taken should learn from, and be shared with, approaches being taken across the UK and internationally.

5.19 Workplace innovation

The business community should work with the Scottish Government and the enterprise bodies to accelerate the embedding of Fair Work principles, in the context of changes to the workplace and to working patterns. This could cover the shift in experience and attitude to flexible and home-working which has been accelerated by the pandemic, and the concerns about precarious and 'gig economy' work.

Underpinning all activity is the importance of work that is fair and rewarding both for economic success and for the wellbeing of the Scottish people. The Scottish Government has made significant progress in this area: but we think that, in response to the crisis, it should build further on that.

Changes in what constitutes the workplace and how work is undertaken - remote and home-working, flexible working, workplace ergonomics, safe working - will be accelerated by the crisis.

Many of these changes could be positive. As businesses rethink the way they operate in the wake of the crisis, there may be opportunities to introduce a range of new and more flexible forms of employment which would suit the needs of the employer and the circumstances of the employees better than more traditional models. For example, we heard from Unilever about its Agile Working approach, which offers employees a suite of differing options for employment and work patterns.

However, the crisis has also exposed the lack of resilience and the instability of the UK's flexible labour market; and has had a significant impact on those with atypical employment contracts that make their employment status precarious. Addressing the work/workplace implications of the crisis demands an understanding of the evidence and a framework to consider and implement change.

In the absence of legislative power over employment and trade union law and labour market regulation, Scottish policy has adopted a voluntarist approach to addressing a range of economic disrupters. The Fair Work Convention's Fair Work Framework offers a means of addressing the workplace and employment implications of the recovery. Its emphasis on the importance of "effective voice", is critical in giving workers a full say in how the workplace and the nature and quality of work should evolve.

Many - indeed most - businesses have had to re-engineer their businesses during the crisis; this will continue over the recovery period. From modest changes through to wholesale transformation of production processes, change has been imperative, and has been carried out at speed. As we approach the recovery, we have both an unprecedented opportunity and a requirement to develop ways to support workplace innovation, embedded in Fair Work practice. So we think that there is scope to accelerate and strengthen the support available to businesses to ensure workplaces and work practices can change safely, fairly and productively.

In this context, we think that Skills Development Scotland (SDS), in partnership with the enterprise agencies, further and higher education, business and the trade unions, should, by the end of 2020, establish a new Centre for Workplace Transformation, with a fully costed plan. This would be aimed at improving business performance, productivity, innovation, Fair Work, workforce resilience and worker wellbeing.

Many of those identified as key workers in tackling this life and death crisis have hitherto been neither respect nor rewarded as such. Large sections of the workforce in our health and social care sectors; in food production, processing, distribution, and sales; in education and childcare; in key public services; in local and national government; in utilities; and in transport, are amongst the lowest paid and face economic disadvantage on multiple levels.

The Scottish Government is considering how relevant employers and unions can support the development of collectively bargained Fair Work Agreements, including in sectors where the pandemic has highlighted the need to build workforce resilience and address precarious work and poor working conditions and practices. This can learn from the experience of the New Zealand Government.^[43] As a starting point, we think that arrangements should be put in place in the social care and hospitality sectors, with a view to concluding Agreements within a year.

5.20 Skills and the labour market

The Scottish Government should refocus its skills strategies to address the risks of unemployment, recognising the importance of high participation sectors, and of improving the provision of lifelong learning to enable people to reskill.

The June Monthly Economic Brief^[43] from the Scottish Government's Chief Economist outlined the challenge facing the labour market in Scotland. Latest business surveys have shown record falls in business activity in April, reflecting the fact that an estimated 19% of businesses have been temporarily closed in Scotland. It is provisionally estimated^[44] that Scotland's GDP fell by 18.9% in real terms during April, after a fall of 5.0% in March. The Scottish Government estimates that these closures (and wider knock-on effects) have impacted over 750,000 jobs in Scotland between those furloughed and the self-employed who are unable to work.

The latest official labour market data for Scotland^[45] show that the unemployment rate in Scotland was 4.6%, which is 1.1 percentage points up on the quarter and 1.3 points up on the year. The UK unemployment rate was 3.9%. Given the trends since then, the unemployment rate will now be closer now to 7%, and probably higher.

To date, the Coronavirus Job Retention Scheme (CJRS) appears to have been highly successful in mitigating job losses. With the current levels of government fiscal support, in the absence of the scheme, the Office of the Chief Economic Adviser has estimated that the unemployment rate could have reached around 14% by the end of the year.

There is significant uncertainty over how the labour market may recover: but it is clear that the repercussions of the health crisis will be with us for some time. The Scottish Government's Chief Economist has produced illustrative scenarios on how the labour market may recover. Depending on how the recovery progresses, unemployment could reach between 8% and 13% in the latter part of 2020 - which is between 220,000 and around 360,000 people. And although it is expected to fall back after then, it could take between three and six years to return to pre-crisis levels.

The initial priority must be to ensure that existing measures to keep staff in employment are wound down in an orderly and sector-specific manner, recognising the specific circumstances of different sectors. Different sectors are being affected in different ways; some will recover more slowly than others.

In parallel, the various business support schemes should enable viable businesses to maintain staff, even once employers are required to contribute towards the costs of furloughed staff.

As we have already noted, the crisis has exposed the lack of resilience and the instability of the UK's flexible labour market; and it has impacted significantly on those with atypical employment contracts that make their employment status precarious. This calls for a reconsideration of the approach to labour market regulation and enforcement, not least in relation to workplace health and safety; the definition of a worker; working hours; minimum wages; flexible working; and collective rights. These are complex issues that push at the boundaries of currently devolved powers.

Nevertheless, even with substantial action to maintain people in jobs, the scale of the likely increase in unemployment will require a very significant response from the skills and education system in support.

In that context, we support the work being undertaken by the Unemployment Sub-Group of the Enterprise and Skills Strategic Board to look at specific measures that can be put in place immediately. That is clearly essential.

These challenges that the skills and education system will need to address are multiple. They will involve developing detailed approaches across the range of organisations to:

• Maintain existing employees in employment as a transition measure to build back businesses after reopening;
• Maintain the level of in-work training;
• Support people who are made redundant and become unemployed; and
• Increase the availability and suitability of education and learning options, provided by universities, colleges and other providers, to enable retraining and reskilling

Throughout our work we heard a consistent message that there will be more business failures and redundancies in the economy as a consequence of the crisis. This process is already under way; and it will undoubtedly lead to an increase in the need for Partnership Action for Continuing Employment (PACE) type services, offering transition into new jobs or retraining opportunities. So these services will need rapidly to be expanded to provide more proactive support. This will need intense collaboration between the enterprise bodies, local government, SDS and the education sector; and they need urgently to prepare now for an increase in demand in the coming months.

The increase in unemployment is likely to affect 19-25-year-olds disproportionately. Young people will need to learn more employability skills at college to give them a greater chance of moving into a tough post-crisis job market. Many will be catching up on learning after lockdown. And there are risks that existing apprentices will not be able to complete their training.

As a consequence, there is a pressing need to expand the scale and reach of the Flexible Workforce Development Fund (FWDF) to encourage employers to invest in work-based learning to increase productivity and to include small businesses. Colleges have been instrumental in delivering workforce upskilling, reskilling and soft skills; and we heard that the college sector has already helped to support organisations across Scotland to rebuild their businesses and rebuild their confidence. But this will need to go further.

We also heard that there is a pressing need for greater alignment of the skills system in Scotland. SDS characterised the pre-existing challenge facing the labour market in Scotland as follows. In recent years we have seen record levels of employment, but 2 million of Scotland's 2.5 million workers earned £45,000 or less; and of those, around 1 million workers earned between £24,000 and £14,000.

Moreover, notwithstanding the significant investment in skills and education in recent years, there are persistent skills shortages sitting alongside graduate under-employment. This clearly suggests a need for rebalancing of skills provision. Such a rebalancing should include work-based apprenticeships; and should exploit the fact that the crisis has given greater impetus to online learning.

5.21 Universities and colleges

The Scottish Funding Council and the Scottish Government should protect universities and colleges from the financial impact of the crisis, so that they can maintain and enhance their role as 'anchor institutions' and take decisive steps to align their teaching and learning provision, including postgraduate skills training, to meet business and employer needs; and to focus their support for research investment and growth.

Colleges and universities have responded to the crisis by changing approaches to learning and research, supporting the alternative qualification models and responding to the global research effort.

We recognise the enormous contribution made by universities to the economy, including as significant economic 'anchor institutions'. The particular role of universities in Scotland is summarised in the Muscatelli Report^[46] from 2019.

This report highlights the need to encourage greater collaboration within the university sector to boost the sector's performance in research and development and innovation.

The Scottish Funding Council (SFC) outlined in stark terms to us the possible implications of the unique and significant external shock to universities and colleges, and told us that its immediate priority is to provide assurances of stability and continuity. The higher education sector is experiencing a huge fall in international students, and many Scottish universities are highly exposed to this international market. Current funding arrangements in Scotland have benefited from the growth of international students and students from the rest of the UK, which has cross-subsidised tuition for home students and research activities. So the temporary loss of international students directly impacts on provision of education for home students.

The SFC analysis shows that, even allowing for some new and returning international students, and mitigating action by institutions, we might still expect a significant deficit this academic year of at least £450-500 million. All 18 Scottish universities are likely to go into deficit; for several, cash levels could become critical towards the end of this financial year. Bridging support will be required to protect some institutions for the future.

We welcome the recent announcement^[47] that the Scottish Government has commissioned work on the future provision and sustainability of colleges and universities. Over the summer, the SFC will consider its funding model for teaching and learning.

Given the systemically important role of universities, there will be a continuing need to stabilise and protect the sector in the short term.

Looking forward, the sector and institutions will need to adapt and adjust to this major change in income and activities. The consequences of the crisis will reverberate for years, and adapting to this changed operating context will be a major leadership challenge. But it is essential that universities face it.

The demand for learning will remain strong. With the planned wind-down of the current income support schemes, there will be a greater need for upskilling and reskilling provision to support people to get back into the labour market. We expect a disproportionate impact on lower skilled jobs and widespread job losses in hospitality, retail and tourism businesses. Any financial support from government provides the opportunity to respond to global change, and pivot the role of universities and tertiary education within Scotland to meet the needs of economic recovery.

University teaching and research provision needs to respond to these challenges with considerable flexibility. The early signs are strong, with a rapid response to shift teaching online and adaptation of research programmes. The response from the sector body Universities Scotland highlights the scope for further collaboration between institutions, and with other parts of the education sector, to ensure all learners have access to opportunities that meet their ambitions and needs.

This is a significant moment of inflection for universities and colleges. Many institutions are facing serious financial shortfalls. It is vital that a more aligned tertiary education, skills and research system can be built. The SFC and SDS already collaborate on skills provision, but will need closer working and joint planning on a regional approach to develop further regional collaboration. This, in turn, could incentivise colleges and universities to deliver an increasing number of integrated degrees and graduate apprenticeships where two years of delivery are undertaken at college.

In terms of research, given the financial challenges faced by the sector, the SFC will need to consider how a more collaborative and aligned approach could be incentivised between Scotland's most research-intensive universities.

5.22 Apprentice Training

Skills Development Scotland and the Scottish Funding Council should collaborate with colleges, universities and businesses to prioritise apprenticeship training; and should respond to youth unemployment with a flexible learning response. This should include further development of Graduate Apprenticeships and online learning.

Colleges are an agile, collaborative, and inclusive national asset to which the Scottish Government allocates significant resource. As in the aftermath of 2008, colleges will need to be at the heart of the recovery effort.

When considering the role of the college sector, we drew heavily on the recent report^[48] and analysis by Audrey Cumberford and Paul Little. We asked the authors to provide an assessment of the new circumstances following the crisis.

This assessment highlighted that:

• The gains made through the Developing our Young Workforce approach, which was at the heart of the response to the global financial crisis in 2008, are now at risk;
• There is now a need for a targeted and concerted set of interventions, based on a 'triage' approach rather than 'first-aid for all';
• There is an urgency to support some of the most vulnerable groups in society, all of whom are natural clients of the college network. This is not solely about the challenges facing young people: lone parents, low-income families, minority ethnic groups, disabled learners and those with learning difficulties and experience of care or who are estranged are all at risk;
• There is a need to ensure system-wide leadership, and enhanced collaboration across business and learning providers; and
• There is a clear need for flexibility and adaptation of the tertiary education sector to respond to economic recovery.

The Flexible Workforce Development Fund will need to drive a significant increase in activity. In the immediate term, economic recovery will call for the swift introduction by colleges of short course provision targeted at furloughed staff and those seeking to retrain. Colleges can underpin the acceleration of Developing our Young Workforce and ensure the continued availability of a work-based curriculum that helps to offset increases in youth unemployment.

Many apprenticeships have high value in the labour market, but this depends on their quality. Given the financial hit to firms, and the fact that many have had to suspend their apprenticeships, this is a route that will be badly affected by the crisis. It is imperative that we support firms to restart their training. Unfortunately training in the UK is pro-cyclical: firms train less in bad times. So policy intervention will be essential.

Expanding the number of apprenticeships in this period of depressed economic activity will be challenging. Generating new apprenticeships that are not of high quality will undermine the reputation and value of apprenticeships.

Nonetheless, there will be scope to develop the provision of Graduate Apprenticeships, enabling greater coherence of learner progression alongside more jointly delivered degrees.

One of the most striking changes that may come out of the crisis is the normalisation of digital learning. Universities have deployed their experience of online learning to adapt to significant provision of undergraduate teaching.

Against this background, Audrey Cumberford and Paul Little recommended targeted investment for online learning to underpin a shared capacity and capability for a realigned tertiary sector.

Universities should also be able to provide Postgraduate Skills Training to Scottish students as part of the recovery. Key sectors such as manufacturing, nanotechnology and life sciences rely on a flow of high-level skills at advanced undergraduate and postgraduate level. As discussed earlier, Brexit may create bottlenecks in these skills: the SFC should consider how supply can be maintained.

5.23 A Scottish Jobs Guarantee

The business community, with the support of the Scottish Government and in partnership with local authorities, should mobilise urgently to develop a business-led Scottish Jobs Guarantee scheme. This would respond to the likely increase in unemployment among young people and the serious, generational challenge that this represents for our country,

The damage done to the generation currently aged 16-25 and their job prospects will be a scar across their working lives if there is no urgent, ambitious and focused intervention to address it.

We were struck by the success of the Edinburgh Guarantee, where businesses worked in partnership with the local authority and other agencies to offer placements of at least six months to young people. The current circumstances, and the generational challenge facing our country, demand a more ambitious, nationwide approach.

We therefore propose a Scottish Jobs Guarantee, to be led by businesses working in partnership with local authorities and other agencies, and with the active support of the Scottish Government, to ensure that no young person is left behind.

The scheme should offer secure employment, for a period of at least two years, to 16-25 year olds, paid at the Living Wage, with access to training, apprenticeships and the possibility of progression. It should be delivered locally, with brokerage of opportunities between employers and jobseekers: but it should be set within a coherent national framework.

There should be targeted funding support from the Scottish Government to set up the scheme, and to assist small and medium-sized businesses, as well as larger firms, to participate.

We also think the Scottish Government should discuss with the UK Government the arrangements for raising the Apprenticeship Levy, with a view to ensuring that these better meet the needs of Scottish employers, individuals and the Scottish economy.

5.24 The Four Capitals

To promote an approach to economic policy that values all of Scotland's assets, the Scottish Government should consider adopting a Four Capitals framework in forming its future economic strategy, and reporting against it.

As we have noted, we found the Four Capitals framework valuable in seeking to form a view of Scotland's economy that takes account of the full range of our national assets - natural, social, human - as well as the purely financial and physical - and that encourages a more rounded and holistic policy approach. It is entirely consistent with the National Performance Framework.

More importantly, the recovery Scotland needs will require all parts of society to work together in a different way. The Four Capitals approach gives us a lens through which to look at the different aspects of that collective endeavour, and to value the contribution that all parts of our society and country bring to it.

We therefore recommend that the Scottish Government considers using the Four Capitals approach in forming its economic strategy, both in the recovery phase and for the longer term.

This will require considerable technical work in order to measure and monitor our assets, notably in natural capital, as we have already noted: but we think that the potential long-term benefits in terms of policy provide sufficient justification.

5.25 Implementation

To create momentum and build confidence, the Scottish Government should set out its response to the proposals in our report by the end of July, and should publish regular updates on its recovery plan.

The economic recovery will be a long haul. But the action needs to start now. The Scottish Government needs to define and execute its recovery plan with purpose and urgency, in partnership with business and other key stakeholders. The Scottish Government should publish its response to our proposals, and set out its strategy and initial action plan for economic recovery by the end of July. In order to maintain momentum, it should publish regular updates on that strategy and its execution over at least the next year.

Our recommendations are diverse and wide-ranging. Implementing them will create many workstreams and involve multiple partners and stakeholders. It is not for us to prescribe in detail how each one should be taken forward. But pace, alignment and coherence in the execution of the recovery plan will be required. We hope that the Scottish Government will adopt a streamlined and strategic approach, and will take the opportunity to revisit any structures and processes which may stand in the way of the focused, thoughtful but urgent action that the recovery demands.