Framework for Economic Development in Scotland
Part 1 The Framework
1.1 The Vision and Objectives of the Framework
The first Framework for Economic Development in Scotland1 had a clear vision:
to raise the quality of life of the Scottish people through increasing the economic opportunities for all on a socially and environmentally sustainable basis.
This remains the vision of the Executive. It reflects the kind of society that we would like to see in 5-10 years time and the nature of the economy that we believe is necessary in order to achieve this goal.
It is reflected in the Executive's Partnership Agreement for a Better Scotland2, which sets out the principles underpinning this administration. It notes succinctly that:
"Growing the economy is our top priority. A successful economy is key to our future prosperity and a pre-requisite for building first class public services, social justice and a Scotland of opportunity."
The primary challenge in the Scottish economy is, therefore, to establish an accelerated and sustainable rate of economic growth.
The Executive's economic objectives are on two levels: at the top level, there are the principal outcome objectives, which are underpinned by the enabling objectives that support the achievement of these outcomes.
The principal outcome objectives. FEDS is focussed on achieving four key outcomes that are fundamental to Executive policy:
- economic growth - with growth accelerated and sustained through greater competitiveness in the global economy;
- regional development - with economic growth a pre-requisite for all regions to enjoy the same economic opportunities, and with regional development itself contributing to national economic prosperity;
- closing the opportunity gap - with economic growth a pre-requisite for all in society to enjoy enhanced economic opportunities, and with social development in turn contributing to national economic prosperity; and
- sustainable development - in economic, social and environmental terms.
The Framework for Economic Development in Scotland
The enabling objectives. The achievement of these desired outcomes depends upon a complex array of economic drivers. Establishing the underlying conditions and context for economic growth to flourish is, therefore, a critical step. There are four key enabling objectives:
- a stable and supportive macroeconomic environment;
- a facilitating national economic context: encompassing the physical, human and electronic infrastructure;
- dynamic competitiveness in Scottish enterprises; and
- economic policies and programmes to secure the social, regional and environmental objectives.
The first objective here is widely acknowledged as being a pre-requisite for economic growth and stability. It is clearly the primary responsibility of the UK Government - although the Executive bears responsibility for supporting and contributing to this objective - while the other three enabling objectives form the focus of the Executive's approach. It is in these respects that the public sector has potentially the greatest contribution to make to the success of private sector entrepreneurial activity and to the overall growth performance of the Scottish economy.
1.2 The Strategic Approach
Fulfilling the vision set out in FEDS requires a well-articulated strategic approach to address the Executive's economic growth, social justice and sustainability objectives, while acknowledging their clear interdependence. FEDS is designed to be a comprehensive framework for growth.
The productivity of enterprises and of the public sector
Increasing our economic growth rate will be secured through sustained increases in our competitiveness in international and domestic markets. This competitive edge will itself fundamentally depend on raising the underlying productivity of both our enterprises and of our public sector.
The principal focus of the Framework is therefore upon securing a more dynamic economy in which enterprises and individuals are able to respond rapidly and effectively to the continuous change and intense pressures of the global economy. It must be a long-term strategy that secures fundamental change and sustainability, and one that is a partnership between the private and public sectors.
The productivity and associated dynamic competitiveness of our enterprises remains the fundamental driver of our economic performance. It is equally the key challenge.
Productivity is driven by a range of factors upon which the devolved Scottish government will continue to focus its energies. These are, in part, integral to the operation and management of enterprises themselves and, in part, constitute the wider economic environment in which enterprises need to operate. The most important factors are:
- the basic education and skills of our key resource - our people - and their capacity to renew and enhance these skills on a continuing basis. A skills and learning strategy must embrace the full range of skills, including basic skills of literacy and numeracy for all; the skills required of employees, managers and entrepreneurs; and the skills of our research and academic community.
We must improve the skills of the whole population through further support for the basic education system, by strengthening lifelong learning, and by nurturing higher and further education. This must include a concern for raising our manual and vocational skills. Better skills are the key to improving individual life chances, increasing the flexibility of the labour force and maintaining competitiveness. Scotland has to embrace the knowledge economy and the reality of continual learning if it is to compete in the global marketplace.
- the generation of knowledge is a key element in the growth of the Scottish economy. Competition in the knowledge-intensive global markets will be as acute as in the labour-intensive markets in which Scotland once prospered.
- the physical infrastructure underpins the competitiveness of enterprises, whether it be transportation systems or the electronic infrastructure. High-quality infrastructure is a pre-requisite for thriving and successful enterprise in Scotland as well as delivering an adequate supply of housing. Planning and development structures are also important. With the new National Planning Framework, steps have been taken to ensure that, while competing and sometimes conflicting objectives must be addressed, the contribution of the planning system to economic development is explicitly recognised and is taken into account. It is clear that the planning system needs to be reformed to make it more efficient, more rapid in its processes and more attuned to the needs of business and housing requirements. Transport will continue to be a high priority, with a clear focus on improved strategic planning, infrastructure investment, reducing road congestion and improving public transport.
- the basic entrepreneurial drive and competitiveness of enterprises remain critical elements and are the foundations on which any strategy for growth must build. Entrepreneurial drive continues to be determined by a complex set of factors, ranging from the skills and knowledge of potential entrepreneurs and business people to the confidence they have in the opportunities that Scotland offers.
- without the confidence that Scotland is a buoyant and profitable place to conduct business, entrepreneurs will be cautious and risk averse. Attitudes to business - from primary school through to higher and further education - need to be positive and supportive. The Executive will continue its efforts to promote the enthusiasm and confidence in the Scottish economy that will help create a climate in which enterprise can flourish;
- innovative behaviour of entrepreneurs and managers is a necessary condition for a dynamic economy. The application of the large body of knowledge that is already available - and now more accessible from all over the world - and the cutting-edge knowledge that is generated within the Scottish research community itself is of great importance. Competitiveness rests on innovation leading to a continual process of business development, where the production and marketing of new and refined products is essential;
- the levels of research and development in Scottish business remain very low relative to our major competitors. When the key to securing a continuing productivity advantage lies to a large extent in the ability to access innovative and new methods of working and producing goods and services, this is a crucial challenge;
- an outward focus is equally critical. While the importance of securing new export markets in fast-growing economies and in rapidly growing sectors is familiar, analysis of the strategies of successful businesses suggests a need to encourage companies to be bolder in seeking opportunities beyond exporting. The Global Connections Strategy reflects a shift from focussing on traditional manufacturing-based inward investment and exporting to a new range of business partnerships built on the exchange of knowledge, technology, ideas, skills and people. The Executive campaign to promote Scotland's International Image will also help build overseas business by demonstrating Scotland's cultural, academic and economic strengths.
In addition, the Executive will focus on the continual improvement of public sector productivity through its management of the public finances. As a major element in the Scottish economy in its own right, the Scottish public sector has a crucial role to play. The Executive's expenditure decisions impact both directly and indirectly on economic activity, and the effectiveness and efficiency with which these expenditure programmes are undertaken therefore affect our economic performance. High standards of appraisal and evaluation will be maintained, and there will be a continual drive to identify more innovative and effective mechanisms for delivering and supporting public services. In addition, the strategic approach to raising our own resources through personal and business taxation will play an important role in FEDS in view of their importance for business and personal incentives and behaviour. We will, where appropriate, take the opportunity to provide incentives for growth, through, for example, the Small Business Rates Relief Scheme. Specifically, the Executive's strategy has been to set the maximum annual increase in the poundage rate equal to the growth in the Retail Price Index, while it will not make use of the powers to vary the basic rate of income tax at this time.
The underlying principles
The Framework for Economic Development in Scotland is based on several underlying principles:
Long-term approach. FEDS requires a long-term strategic approach that focuses on the key determinants of economic development. Many of these need, by their very nature, to be addressed through consistent and sustained policy implementation over many years. Some have very long lead times - for example, the investment in the early years of children's education to provide eventual but long-lasting economic and social returns. Others relate to the economic behaviour of individuals - and, especially the basic attitudes, risk taking and decision making of individual entrepreneurs and potential entrepreneurs - where the necessary culture change may take many years of sustained effort.
Complementarity of the public and private sectors. Economic growth is primarily determined by the success of enterprises in developing products that can compete effectively both domestically and throughout the world. While Government can make a contribution, it is the dynamism of the private sector on which future prosperity depends.
The Executive can help to encourage increased productivity and the competitiveness of Scottish enterprises in a number of ways. It can seek to respond to market failure in the exploitation by business of science and research; it can ensure that Scotland has a physical and electronic infrastructure that supports growth; and it can provide through the education system at all levels for the skills which the competitive economy of the future will require. And it can work in partnership with the private sector to anticipate and respond to the global challenges from which no open economy can be immune.
The prevailing set of economic powers. FEDS takes the present constitutional settlement, and notably the definition of powers and responsibilities as set out in the Scotland Act (1998), as its basis. Consequently, while the devolved Scottish government has control over a very significant array of key economic development powers and policy instruments, it does not have powers over the policy areas reserved to the UK level. These include UK macroeconomic and microeconomic policies relating notably to tax and welfare, programmes to provide work incentives, competition, and some regulatory policy. The strategic approach in FEDS is based on the assumption that the present distribution of powers remains unchanged.
Importance of sustainability. FEDS takes seriously the responsibility of preserving for future generations the economic opportunities and environmental resources that we enjoy today.
The economic linkages between different sectors of the economy continue to be important. For example, the flows of knowledge and research into the enterprise sector are of paramount importance, as is the understanding within the worlds of education and training of individuals' needs for education and lifelong learning in an ever-changing economic environment. Similarly, the economic importance of the physical infrastructure and the planning framework is immense, both factors bearing heavily on the decision-making process within enterprises.
Economic growth is a national priority. It is not the sole responsibility of one area of government, or dependent on one sector. Economic prosperity is only secured through the efforts and contributions of a wide range of individuals and bodies, working in an integrated and collaborative manner. This means that all the Departments within the Executive play a part in determining - and contributing to - Scottish economic development.
Balancing other objectives with these economic objectives will be challenging, especially as regards the identification of sustainable economic policies and the enhancing of regional and social opportunities. The devolved Scottish government's vision clearly demands the delivery of the key outcomes for both the present and future benefit of Scottish society as a whole. Importantly, however, FEDS is predicated on the understanding that achieving our equity and sustainability objectives is closely tied to achieving our economic objectives.
While the fundamental economic analysis and the strategic direction of recent years remain valid, there are issues that have progressively increased in importance in the years since the first directions were set out in the original edition of FEDS. These are accorded a greater emphasis here as integral elements of the Executive's economic strategy. Each is discussed in greater detail below, but, in summary, they include:
- managing public finances, so that we are efficient and effective in procuring and providing public services and investment, upholding the highest standards of financial and economic management;
- raising the environmental sustainability of economic development to safeguard the interests of future generations;
- demographic change in Scotland, which poses a set of challenges that we have to meet to guarantee the long-run sustainability of the economy; and
- the planning system, since it can facilitate or constrain enterprise and business development, and the quality of life.
Within this Framework, the devolved Scottish government has identified five key drivers of economic development that are especially important and to which it will give priority.
These are key elements in promoting both private sector and public sector productivity:
- basic education and skills: crucial to any strategy for economic growth and the bedrock for the foundation of a competitive economy;
- research & development and innovation: the foundations for improvements in productivity and for sustainable global competitiveness;
- entrepreneurial dynamism: the creation of new enterprise and a positive, risk-taking attitude to enterprise are central to the establishment of a dynamic economy;
- the electronic and physical infrastructure: joining business to business, consumer to business, and ensuring the efficient movement of goods, people, and ideas to the right places at the right times; and
- managing public sector resources more effectively: improving the efficiency and effectiveness with which resources are deployed in the provision of public services.
1.3 The Scale of the Challenge
The scale of the challenge is evident from the present size of the productivity gap between Scotland and many of the advanced economies of the world. While there are various definitions of productivity and there are familiar difficulties in measurement, the data all tell a similar story: namely, that the UK lags behind its major competitors and Scotland lags behind the UK.
The table below demonstrates the magnitude of the challenge on the basis of one critical measure, GDP per hour worked. The gap in Scottish productivity is long-standing and it is clear that it has widened over the period from 1996 to 2002.
GDP per hour3worked 1996 - 2002 (UK = 100)