First Minister Alex Salmond
The global economy and financial markets
Strathclyde University
Thursday, September 18, 2008
_______________________
Good evening. I am delighted to return to University of Strathclyde to deliver this year's Lecture for the Principal of the Faculty of Law, Arts and Social Sciences.
Let me first thank Prof Neil Hutton for the kind invitation. Some of you here will - I hope - recognise me as Scotland's First Minister. However, this evening I am here in another, much more important calling - as visiting professor of Economics at the University of Strathclyde.
It strikes me that that is a role of which I can and should make much more. Because repeated surveys show the very high level of public trust in the views of professors.
Indeed a MORI poll in 2006 found that only 20 per cent of people expressed trust in 'politicians'. That figure was a single percentage point ahead of the least trusted profession - journalists. Meanwhile the corresponding figure for trust in 'professors' was a massive 80 per cent.
So do not be surprised if you start to hear a bit more of this respectable alter ego, Professor Salmond. Especially on Newsnight. And during First Minister's Questions.
The University of Strathclyde
It is a pleasure to return here to the University of Strathclyde, which is continuing to thrive and to grow.
This is now the third largest university in Scotland. And that's no mean feat, when one considers that some of your now smaller rivals - such as St Andrew's and Aberdeen - had a five hundred year head-start.
And with the dynamism evident here at this University, and throughout the City of Glasgow, the future looks bright.
Glasgow's recent recognition as UNESCO City of Music - making it only the third European city to receive this award - is a huge boost for the cultural life of this city and its academic future.
The 2014 Commonwealth Games, the Glasgow Games, will also bring fantastic opportunities for this city - and indeed the whole of Scotland.
And I was delighted to hear that last month it was confirmed that this university will have a major role in delivering the global sports conference in advance of the 2012 Olympics.
The economics of independence
It is now five years since - with the kind support of this university and of The Scotsman newspaper - I undertook a series of lectures on the Scottish economy.
Those lectures, which took place in February and March 2003, focused on the positive economic case for independence.
The purpose of those lectures was simple: to consider how best to increase economic growth and improve living standards for the people of this country.
As an aside let me add that it is no coincidence that as First Minister I have put that same purpose at the very heart of my government's work.
And I had planned to return to those main arguments for fiscal autonomy and consider them with you this evening.
However, that was before the recent turmoil in global financial markets - and the impact that has been allowed to lay low Scotland's oldest and one of its strongest and most successful banking institutions.
It is worth considering that the bank of Scotland was founded by an Act of the old Scots Parliament. That it has survived the Napoleonic Wars and the Great Depression. That is has made it through mercantilism and monetarism. And now it has been brought down by short-sellers in the equity markets.
My Government - and indeed the whole Scottish Parliament - are committed to responding to those challenges directly and forcefully, to defend Scotland's economic interests.
So tonight I want to discuss with you our understanding of those challenges, which are the product of deeper and longstanding imbalances in the global economy.
I want to talk about the firm and concerted international response that is needed from governments and central banks - to boost demand and support confidence in asset values.
And I will set out the actions the Scottish Government is taking - using our responsibilities fully to support growth and confidence in the Scottish economy.
My message is clear. First, in these turbulent conditions in financial markets, this Government will do all we can to support the Scottish financial sector - and to maintain growth and confidence in the real economy.
And second, we never forget that this Government was elected with a core Purpose to increase sustainable economic growth and deliver long-term success for Scotland.
Our record in office - our priority today - our mission in the months and years to come - is achieving that purpose. Doing full justice to the rising ambitions of our people - for Scottish society and for Scotland's economy.
The Scottish economy five years on
Before we turn directly to the global challenges - and the considerable opportunities awaiting us - let me provide some brief perspective on Scotland's overall economic performance.
Over the past five years, economic growth has averaged 2.2 per cent annually. That was slightly above our long-term average but hardly spectacular. And clearly below the growth rate of 2.8 per cent for the UK as a whole.
At the sectoral level, since 2003 there has been significant growth in some of Scotland's key knowledge industries - the life sciences, the creative industries and in financial services - about which I will say more later.
We should also be encouraged, relative to the picture five years ago, to see the emergence of new growth industries.
Here we can look to renewable energy, which in the last two months alone has seen almost £1 billion of new investment - and offers the prospect of continued growth.
The Scottish labour market has also performed well. Based on the standard international definition, Scotland's unemployment stands at a record low of 4.2 per cent. And that is well below the UK level of 5.5 per cent.
Scotland's employment rate of 76.3 per cent is also close to a record high, and well above the UK rate of 74.7 per cent.
And there is further good news. Scotland's declining population had been a longstanding concern - in terms of our skills base, economic growth, and funding our public services and social provision.
However in June this year we learned that that trend had been reversed. Since 2001, Scotland's population had grown by 80,000, reaching its highest level since 1983.
That growth was largely from a net migration - partly driven by improvements in Scotland's labour market. And that also holds out the prospect of retaining more of our own talent - the best and brightest of our young people - which is crucial to achieving our full economic potential.
Finally, let me turn to Scotland's fiscal position. For so long it was assumed - quite inaccurately - that this country ran a sizeable deficit relative to the UK, and that Scotland could not possibly pay our way. But that is not, and I would argue never has been the case.
As I pointed out in 2003, the Government Expenditure and Revenue Scotland study showed that with a geographic share of revenues from the North Sea, Scotland's fiscal position looked entirely manageable.
And those estimates for 2000-2001 were based on an oil price of $29 a barrel. This month it has averaged $100.
The most recent GERS survey, covering 2006-07, made some important improvements to the methodology, thanks in large part to the work of government statisticians - and that formidable economic and statistical duo, Jim and Margaret Cuthbert.
And that study showed that including a geographic share of oil and gas revenues, Scotland's current budget balance would not only be stronger than the overall UK position - but actually in surplus by 0.7 per cent of GDP.
In these tougher times of rising energy costs, that point is certainly not lost on my government - and indeed on businesses and households across Scotland.
Because, while the UK Government finds itself behind the eight ball, unable to stimulate the economy in the face of ever higher borrowing, Scotland should be prospering from an energy windfall - not suffering from growing fuel poverty.
The global perspective
Let me turn to consider the global perspective, and some of the major trends we are seeing today.
When we look at the immediate global economic outlook, we see a widespread slowdown across the advanced nations. That slowdown has been driven by two main factors. One, the credit crunch, which began last year in mortgage markets and has spread throughout much of the financial system.
And two, the sharp rise in prices for key commodities, particularly energy and food. These price rises have been passed through to the real economy - pushing up inflation and causing real pain for Scottish households and businesses.
That is why the Scottish Government has pressed for strong action from the UK Government to alleviate the effect of these rising costs - and we are committed to doing what we can.
There are signs that these price pressures are finally receding. For example, Goldman Sachs Commodity Index has fallen around 25 per cent from its record high earlier this year, though the Index is still 45 per cent higher than last year.
As global price pressures begin to ease, there may be the opportunity to reduce interest rates in Europe and America without stoking a resurgence of inflation. That is positive.
Speculation and the credit crunch
However, it is clear that the credit crunch is not yet over - and indeed may be intensifying.
Over the past few days we have witnessed quite remarkable events rock world financial markets, with the impact of these tremors felt acutely here in Scotland.
Witness the collapse of Lehman Brothers, one of Wall Street's biggest and seemingly strongest investment banks. And also the effective nationalisation of a major US insurer, AIG.
There might be an argument that the problems of those institutions were largely self-inflicted, reflecting a culture of excessive risk taking and poor risk management.
However the irresponsible and destructive speculative attacks that we have seen this week on HBOS were certainly not justified by any fundamentals. They amounted to little more than vandalism.
It is toxic trading which has allowed HBOS, an otherwise strong, viable, well-capitalised institution, to be picked off. Today, it leaves thousands of employees north and south of the border fearing for their future.
It is unacceptable that an institution that is given a clean bill of health by the financial regulators can, within hours, be brought to its knees.
Consider this statement on the Financial Services Authority website only yesterday: "We are satisfied that HBOS is a well-capitalised bank that continues to fund its business in a satisfactory way."
That could not be clearer. And that is why the Scottish Parliament united this afternoon to express outrage at the short-selling that has laid low the Bank of Scotland.
And tonight I repeat my demand that UK authorities act to protect our financial institutions from these unacceptable attempts to manipulate the market.
In the aftermath of the Great Depression, John Maynard Keynes wrote of these risks in his General Theory.
It appears that Keynes, writing more than seventy years ago, understood the limitations and failures of the market better than most of today's regulators. He wrote: "the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done."
Quite so. Although, belatedly, we see a growing international acceptance of this problem.
Today Russian authorities moved to outlaw short-selling. In the USA restrictions have been placed on this activity and our regulators - and the UK government - need to do more than current proposals on disclosure of short positions and restrictions during right issues.
If authorities do not act, the risk remains that the actions that have undermined HBOS will be repeated at the expense of others.
Responding to HBOS
Over the course of today I have spoken to both banks and to the trade unions representing the vast majority of staff.
Nothing I have said should be interpreted as in any way critical of wither Lloyds TSB or HBOS. Both are excellent institutions, which have made a great contribution to the Scottish economy.
However there are clear and present concerns about the potential impact of the merger.
I have asked the Financial Services Advisory Board to convene in special session early next week and Lloyds TSB have agreed to a meeting next Tuesday with the Scottish Government to explore the issues that are now important for staff and customers and for the wider financial sector in Scotland.
I am heartened by the confirmation from Lloyds TSB that their focus is to keep jobs in Scotland. And over these next few crucial days it is important that Scotland's case is put effectively. And it is a strong case.
The Bank of Scotland identity must remain with a strong and viable corporate headquarters retained on the Mound.
Alongside that we must maximize the number of other decision making functions retained in Scotland. These are integral to the success and performance of HBOS' operations - the nerve centre of a profitable and successful retail and commercial bank.
At the heart of our case - and I made these points directly to Lloyds TSB this morning - is a cost model for financial services in Scotland that is highly competitive.
The growing financial district in Glasgow, alongside the strength and expertise that exists in Edinburgh, means that there are big benefits for any business - not only the new merged bank - to maximise employment in Scotland.
So the Scottish government will strain every sinew to ensure that we secure the best result for Scotland in the face of even these hugely challenging circumstances.
As we look to the future, our argument must be one of confidence in the core strengths that underpin Scotland's financial sector. Maximising employment in Scotland is the right business choice - for Lloyds TSB and for so many other large financial institutions.
Supporting the global recovery
We cannot say how much longer it will take for confidence to return to the markets.
But the outcome matters just as much for the health of the real economy. So it is vital that policymakers take the necessary steps to uphold confidence in asset values.
Two sets of response will be required from policymakers and governments in the advanced economies.
The first response - in conjunction with hard action to restrict short-selling - is to set a clear and coordinated policy of offering liquidity, term money, to sound and well capitalised financial institutions, should they require it.
I welcome the $180 billion that has been injected into world markets today to ensure short and medium term liquidity.
Such actions cannot now help HBOS, but they must be put in place to halt future raids.
And the second response is if anything more important. There needs to be a substantial injection of demand, a reflation, to support business confidence and expectations of future earnings growth - now and over the medium term.
Some governments have already responded, injecting new demand into the economy. The United States Government has introduced a stimulus package amounting to 1.2 per cent of GDP. And Japan and Spain have gone further, providing a fiscal boost equivalent to 2.1 per cent and 4.2 per cent of GDP respectively.
In the UK the response has been inadequate and indeed inadvertent - a total package worth 0.3 per cent of GDP, mainly to clean-up after the botched 10p tax reform.
Much more can be done - and it must be done. And one helpful step would be to take further action to reduce household energy bills - boosting demand, reducing inflationary pressure and sheltering households from the risk of fuel poverty.
There are no golden rules to prepare us for a situation like this. So again I call on the UK Government to take rapid and effective action to support growth and confidence.
Further down the line, there will be need to be significant reforms - and quite probably tougher regulation - within the financial sector. In particular, to ensure stronger risk management and better financial reporting.
A financial crisis may start with a loss of confidence in sub-prime markets. But if this ripples much wider, eroding general asset values, then clearly lending that was made on a sound and sensible basis can itself become regarded as 'sub-prime'. Which is why the effort to sustain asset values is so important.
So let me repeat the immediate and basic challenge. To support demand and confidence during this turbulent period in global financial markets. And to limit the extent of the fallout on the real economy.
Resilience of the Scottish economy
It is worth noting here the real resilience of the Scottish economy in the face of immediate global challenges. That resilience is borne out in a range of key indicators.
Economic growth has at least matched or surpassed the UK rate in each of the three previous quarters, and the Scottish economy is expected to continue growing into next year.
Our labour market continues to outperform the UK - with higher employment, higher workforce participation rates, and significantly lower unemployment.
While retail sales growth has slowed across the UK, the Scottish retail sector has continued to demonstrate resilience. In August, the British Retail Consortium reported 6.6 per cent year-on-year growth in Scotland, compared to just 1.4 per cent across the UK.
Meanwhile house prices in Scotland have grown by 2.7 per cent since the start of this year - while the rest of the UK has seen house prices fall 1.8 per cent. Although of course we should recognise that values in Scotland have been sustained against a backdrop of falling transaction numbers.
On trade, the most recent trade figures showed Scotland's manufactured exports doing well - up by 2.3 per cent in the first quarter of this year alone.
We certainly cannot take this economic resilience for granted - and the Scottish Government is taking action to support to it.
That is why one month ago we unveiled a new programme of measures to support the Scottish economy - bringing forward capital spending, particularly on social housing.
Adjusting the planning and regulatory environment to help businesses and individuals.
Taking action to boost business confidence.
And working to alleviate the effects of rising energy prices and promoting energy efficiency.
On which point, the Government was pleased to report on a positive outcome from our discussions with the main energy suppliers in Scotland.
As a result, Scotland should secure its fair share of the UK-wide fund to meet the Carbon Emission Reductions Target, releasing annual investment of £107 million each year in cutting household fuel bills - or £321 million over the next three years.
And, together with the Council Tax freeze that we have delivered with local government, that should provide some welcome relief to families across Scotland.
From the global slowdown to global recovery
We have made clear our determination to respond to the current economic difficulties. For Scotland to emerge stronger - and well placed to deliver faster, sustainable economic growth.
And we have argued that the small independent economies in Europe will also be well placed to respond, and to continue generating faster growth - not least because of their greater exposure to global trade and competition.
Over the three decades, the evidence is clear. These small independent European nations have grown at an annual rate of 2.7 per cent, compared to 1.9 per cent in Scotland.
That difference may sound small. But the long term results are striking. If Scotland's average growth rate over this period had matched those small, independent European nations, our economy today would be larger by at least one quarter.
Of course I recognise that these countries face challenges a result of the international financial crisis and global economic slowdown.
We cannot ignore these effects. But similar problems are manifest, to at least an equivalent degree, in large economies.
In the UK, where Northern Rock has been forced into public ownership. And where, according to the Organisation for Economic Cooperation and Development, a recession is quite likely in the second half of this year.
In Japan, which has just recorded one quarter of sharply negative growth and may be heading into recession.
And in the United States, where two major banking institutions have collapsed. And the government has effectively nationalised around half of total mortgage lending and a significant share of the insurance market.
This is not business as usual. These are signs of stress and strain throughout the advanced economies. It is incumbent on policymakers to respond, to support demand and confidence.
Lessons for the future
And it is also vital that we draw the right conclusions for the future - in terms of policy and overall economic strategy.
At this stage, let me suggest four conclusions we should draw. In time, I suspect there are likely to be several more.
First, in these economic circumstances the real distinction does not concern size. It concerns how well prepared each individual country is to respond to economic shocks.
For example, Norway, cushioned by an oil fund worth around £200 billion, has been relatively stable - continuing to record steady economic growth and forecasting a record budget surplus during 2008.
A second conclusion concerns the need to maintain vigilance and prudence during good economic times.
During periods of faster growth, excessive optimism or risk-taking - what Alan Greenspan famously called 'irrational exuberance' - can create powerful imbalances in asset prices, including in the housing market, that can subsequently destabilise the economy.
This underlines the need to maintain strong financial regulation and oversight.
To manage the public finances cautiously and carefully throughout the economic cycle so that the fiscal cupboard is not bare when the lean times arrive.
And the aim that, as far as possible, policy should promote broad-based economic growth, rather than rely heavily on one or two sectors - and particularly avoid stoking up asset bubbles such as we have witnessed in the UK housing market.
A third conclusion is that, with some painful adjustments domestically and credit markets still tight, openness to the global economy will prove to be an important source of future growth.
Despite the current slowdown, the International Monetary Fund is forecasting world trade to grow more than 5 per cent in this year and the next.
So this means that the opportunities are out there for businesses and economies that are able to position themselves most effectively.
Again, I would argue that it is our neighbours - those small independent European nations - who will be well placed to recover quickly. And I want Scotland to share fully in those future opportunities.
That leads me to a fourth and final conclusion.
The importance of maintaining positive momentum in the economy, and continuing to look for new opportunities.
All governments have an ability to influence the economy - to a large or small degree, and with a positive or negative effect.
Since taking office in May last year, my government has worked relentlessly - doing everything we can to deliver on our overarching Purpose and to raise Scotland's global profile. To champion our key sectors of comparative advantage. And to create new commercial opportunities.
The Small Business Bonus Scheme - cutting or abolishing rates for 150,000 small businesses across Scotland - was an early sign of our commitment.
And we have a continued, positive role to play - working with Scottish businesses and our social partners across the economy to help generate new opportunities for growth.
That is why we are backing the recommendations of the Scottish Broadcasting Commission - an independent review set up by this Government to help create new economic and cultural opportunities for Scotland's broadcasting industry.
That initiative has already produced substantial success, with the BBC committing to raise Scotland's share of network production to at least match our population share of total UK output.
And the Commission's proposal for a new Scottish network - a digital public service channel, funded by a new UK settlement for Public Service Broadcasting plurality - would enable further growth, and offer high quality public service broadcasting truly on behalf of the people of Scotland.
Separately, in our tourism sector, the Scottish Government is committed to making the very most of next year's Homecoming celebrations. So that 2009 will be a tremendous year for Scottish business and tourism, as well as for Scots across the globe.
And this Government is determined to support the growth of Scotland's renewable energy sector - truly one of the industries of the future. An area of major competitive advantage for Scotland. And a sector which in the past two months alone has delivered nearly £1 billion of new investment into the Scottish economy.
Together with Scottish Power, Scottish Southern Energy and the Scottish Renewables Forum, we have developed proposals for a new and better transmission charging regime. Removing a major obstacle to new development in this vital and growing sector.
Those reforms should provide our industry with the incentives and the certainty to capitalise on Scotland's vast resources - the potential to become the Saudi Arabia of renewable energy.
And that is fully in line with this Government's commitment to Scotland. A commitment to stand up for our economic interests. To back Scottish business at every opportunity. And to demand the bold changes that are needed to help deliver strong sustainable economic growth - for the benefit of all our people.
Conclusion
Let me draw my remarks to a close here. Since day one, my Government has sought to address that position. To energise the Scottish economy. And to build a platform for achieving our overarching Purpose of increasing sustainable economic growth.
We are committed to doing all that we can - with the responsibilities and the opportunities available - to deliver on that Purpose.
And we know that, rightly, the people of Scotland will judge us on our results.
Equally, we know that it is right to stand up for Scotland, and to make the case for the new responsibilities to allow this country and our people to achieve our full potential - as an economy and a society.
Scotland faces economic challenges today, in common with every other advanced economy. Our economy continues to show resilience.
Looking across the world today, we may see signs of pessimism in some places. Of a lack of direction, or fear for the future.
But not here, not in Scotland. We understand the challenges ahead. We are facing up to them. And we have our eyes open to new opportunities and new rewards.
Because this Scottish Government is committed to leading a course, taking the right steps for Scotland to succeed.
That is our mission and our duty. And today, tomorrow, and in the coming years, we will do our utmost to help Scotland flourish.