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Nurturing Wealth Creation

Key issues: Creating a competitive environment for long-term wealth creation

Wealth creation lies at the heart of all successful economies. In the process of wealth creation, business in general and manufacturing in particular have an important and vital role to play.

While it can be argued that Government and politicians play an important role in wealth distribution, it is absolutely vital that they also take the lead in creating the right environment for wealth creation. Without wealth creation there can be no meaningful wealth distribution.

In view of the perceived urgency of the situation, the Group focused principally on identifying actions which, in the short to medium term, could represent a positive change for Scottish manufacturers.

However, in doing so, the Group recognised that the real key to sustainable economic success is unlikely to lie in short-term measures, but rather in long-term policies focused on giving the country a sustainable competitive edge on the international scene.

On the basis of the views gathered from a questionnaire survey and workshops, there would appear to be general consensus on the priority areas central to creating a competitive environment for long-term wealth creation:

• The fiscal and regulatory regime
• The physical infrastructure
• The skills base
• The political climate

In all of these areas, Government has an important and long-term role to play.

Irrespective of short-term imperatives, in the context of the competitive global economy, the overall objective should be to create a climate which is particularly favourable to business and enterprise in Scotland, i.e. to create a sustainable national competitive advantage in terms of wealth creation.

Devolution potentially offers the Scottish Executive the opportunity to achieve this for Scotland.

In terms of Government action, the current and proposed fiscal regime, including business rates, was identified as a major area of concern, together with the inadequate transport infrastructure (both within Scotland and throughout the UK), and the apparently ever-increasing amount of regulation and 'red tape'.

There was also a more general concern that many of our politicians still do not appear to have the economy high among their personal priorities and the feeling that more could be done by the Executive to promote both Scottish manufacturing and indeed Scottish business in general.

As far as action by business is concerned, the major areas of improvement in terms of increasing business effectiveness focused on the need to improve employee skills at all levels, but specifically those of senior management and of the people tasked with providing leadership. The importance of maintaining an effective and competitive cost base was also seen as a high priority.

In this section we specifically focus on these key policy areas. Subsequent sections cover these broad areas in more detail and also focus on other specific recommendations relating to areas of concern.

The fiscal and regulatory regime

The last few years have seen a significant increase in the current and proposed tax and regulatory burden imposed on business.

The abolition of dividend tax credit for pension funds, in advance of a marked and unexpected fall in equity values, has not only contributed to the virtual disappearance of final salary schemes in the private sector, but also to the requirement of many public and indeed, private companies, to transfer significant sums into their existing pension schemes. This has decreased the sums available for investment in the rest of the business.

The significant increase in National Insurance contributions due in April 2003 will represent a significant tax burden not only on individuals but also on all businesses throughout the UK.

The UK has a higher business tax take as a proportion of GDP than the US, Germany and France. In terms of regulation, many would argue that we lead the field.

Although mainly the responsibility of Westminster, there is little doubt that such changes have had, and will have, a significant impact on Scottish business, particularly on those in the manufacturing sector, many of whose finances are already under significant pressure.

In terms of creating a competitive fiscal environment in Scotland, one area of particular relevance to business, for which the Scottish Executive has specific responsibility, is business rates.

While, in the short term, the Scottish Executive is urged to bring Scotland into line with the rest of the UK, business rates offer the possibility of creating a distinct competitive advantage for Scotland in the longer term.

Similarly, in terms of the regulatory environment,

and;

The physical infrastructure

Improvements to physical infrastructure and, in particular, transportation take time to implement and deliver.

Decades of under-investment cannot be corrected overnight. However, a modern, reliable and truly-integrated transport system must be planned and developed now if it is to be delivered in the foreseeable future.

Transport is a devolved matter and so the Scottish Executive has the opportunity to create a competitive advantage for Scottish business in terms of allowing goods and people to be transported with an ease and efficiency which exceeds expectations and makes Scotland the preferred choice of manufacturers.

Not only is the physical transport infrastructure important, it is increasingly the electronic infrastructure which can give a company, or indeed a country, a competitive edge in today's global economy.

Access to affordable broadband services is a key element. Businesses in Scotland are currently disadvantaged in this respect compared to those in many other parts of both the UK and continental Europe.

The skills base

Businesses that fail to continually improve the skills of their people at all levels, or which fail to invest in innovation, will find it difficult to compete in the global economy. A commitment to continuous improvement and lifelong learning is essential to give Scottish manufacturers a sustainable competitive advantage.

The general skill level of Scotland's workforce, as judged against international standards, is relatively high. Attracting skilled staff is seen as a low-ranking challenge for manufacturers.

However, there is widespread concern that a significant number, albeit a small minority, of Scotland's youth are still leaving school without adequate literacy and numeracy skills.

Added to which, as a recent report commissioned by the Scottish Executive pointed out "up to 800,000 Scots of working age have very low literacy and numeracy skills" and a further 24% of all Scots in employment have no qualifications.

In addition, too many of Scotland's businesses fair badly when compared to international benchmarks in terms of the quality of senior management expertise and overall leadership.

Training is often seen as something more appropriate to the workforce than to management, particularly senior management or indeed the Chief Executive or even Board level. On the assumption that better management leads to better companies which lead to more effective wealth creation:

While the Scottish Executive has a role to play in encouraging business to invest in their people, ultimate responsibility lies with businesses themselves.

In terms of primary and secondary education, however, responsibility for ensuring adequate standards rests firmly with the Scottish Executive.

There can be no excuse for any of the nation's youth failing to acquire the basic skills required, not only to contribute to the economic health of the country, but also to benefit from the increasing number of opportunities available for lifelong learning, particularly in the tertiary educational sector.

The political climate

Despite the commitment demonstrated by both the First Minister and the Minister for Enterprise, Transport and Lifelong Learning to economic development, there is still considerable concern throughout manufacturing industry, not only that many of our politicians have little or no apparent knowledge of, or interest in, industry, but also that not enough is being done by the Executive to communicate and promote wealth creation in Scotland.

Communicating the attractions of Scotland, both internally and externally, as the place to do business is important to both present and future employers. So too is increasing awareness of the support available to manufacturers.

These recommendations - and others - are explored in more detail in the following sections.

Although this report makes no attempt to set performance indicators for the individual recommendations, it is important that in specific areas of policy, and particularly those relating to the longer term, specific timescales should be established with clearly identified deadlines for implementation.

Therefore we would expect the response of the Scottish Executive and the UK Government to be measurable, with an indication of timescale.

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