Framework for Economic Development in Scotland

Part 2 Achieving the Outcomes

In this part, we set out six elements of FEDS that form the focus of the devolved Scottish government's programme:

How will the management of public finances contribute?
What will the national economic infrastructure contribute?
What will be contributed to the development of the enterprise sector?
How will we establish sustainable economic development?
How do demographic trends impact on FEDS?
How will we achieve our social and regional objectives?

2.1 How will the Management of Public Finances contribute?⁴

Public sector expenditure in Scotland makes a significant contribution to aggregate GDP and the manner in which our resources are managed has an important influence on economic performance. The devolved Scottish government's economic strategy, therefore, embraces a view of the appropriate size of the public sector in Scotland and the desirable balance between - on the one hand - stimulating the economy and providing the necessary services and investment that will enhance economic performance and - on the other hand - playing a role that inadvertently inhibits private sector development. We are committed to growing the private sector and continue to raise public sector productivity and apply best practice across all areas of government:

Integrity and transparency of expenditure. The Executive's expenditure decisions impact directly and indirectly on economic activity, and the effectiveness and efficiency of the expenditure concerned affects our economic performance. The Executive has set out Five Principles that seek to improve the effectiveness of all expenditure. These relate to the pre-appraisal of expenditure, the identification of the best delivery mechanisms, the identification of benefits, the measurement of these benefits, and the monitoring of delivery. The Executive has also set up a Centre of Expertise for Programme, Policy and Project Delivery which will support better understanding and application of project management skills and, in particular, coordinate the implementation of the Gateway Review process for major initiatives.
Appraisal and effectiveness of expenditure. The Executive evaluates all new spending commitments for their economic, social and environmental impact, and for their value for money. Pre-expenditure assessments are being conducted for all key policies, projects and programmes. These consider the aims and objectives of the proposals, the options for addressing the objectives, the evidence base that supports the proposals, their financial impact and the plans for monitoring and evaluating progress.

The Executive is also committed to the implementation of the 2003 Green Book guidance, Appraisal and Evaluation in Central Government.

Innovation and productivity in the public sector. The Executive is continually seeking to increase the effectiveness with which resources are used. A key aspect is the adoption of more innovative and effective delivery mechanisms. The Efficient Government initiative - which is expected to run for many years - is addressing the potential for a substantive realignment of resources in the public sector. The focus is upon identifying major improvements in service delivery, backroom and support processes to release resources for the enhancement of front-line services, focused on the needs of customers. The results of the ongoing Atkinson Review on the measurement of government output and productivity will advance methodologies in the context of UK National Accounts and will help us identify opportunities for improvement.

The present extent of fiscal powers. Scottish Ministers regard the existing set of fiscal powers to be appropriate. Addressing the critical determinants of economic development that have been identified within FEDS is not inhibited or constrained by the current constitutional arrangements. There is no evidence that these deter investment in physical and human capital or adversely affect other business decisions.
Scottish Ministers do not consider that the vigour with which economic objectives are pursued, its own accountability or the effectiveness with which resources are deployed are adversely affected by the present range of available powers. The current arrangements are both efficient and practical and the UK Government has indicated that it has no intention of revisiting the present UK resource allocation mechanisms.

The management of business taxation. The Executive's approach to non-domestic rates (NDR) is to balance the need to raise revenues for, among other things, expenditure to support economic development, with the avoidance of creating disincentives to enterprise but providing incentives for growth. There are four elements:

aggregate business tax: the devolved Scottish government regards the current resourcing available from UK transfers and from the use of devolved tax-raising powers to be striking the appropriate balance. The aggregate business tax burden in Scotland compares favourably with our key international competitors and with the UK;
the NDR strategy: the maximum annual increase in the poundage rate Scottish Ministers would consider is set equal to the growth in the Retail Price Index; at this maximum rate, NDR income is maintained in real terms;
NDR and the fostering of small enterprises: in view of the potential disproportionate impact of NDR on small businesses, the Executive will continue to foster small enterprise development - which is at the heart of FEDS - through the Small Business Rates Relief Scheme;
Business Improvement Districts (BID): business taxation also has the potential to play a greater role in the enhancement of communities and the Executive is currently consulting widely on whether the establishment of BIDs would make a major contribution to this.

The management of personal taxation. The devolved Scottish government has determined that it will not make use of the powers to vary the basic rate of income tax at this time. While, in principle, a reduction in income tax might increase work incentives, there is no evidence to suggest that the Scottish economy is constrained in this regard. More importantly, the Executive will focus on the effectiveness with which present resources are deployed and on the mechanisms for ensuring such effectiveness.

The future of local taxation. In June 2004 the Executive launched the Independent Review of Local Government Finance. Its remit is to review the different forms of local taxation, including reform of the Council Tax, to identify the problems and opportunities of implementing any changes to the local taxation system in Scotland, including the practicalities and the implications for the rest of the local government finance system and any wider economic impact, and to make recommendations based on this assessment.

2.2 What will the National Economic Infrastructure contribute?⁵

FEDS focuses on six elements of the national economic infrastructure which play a crucial role in facilitating and stimulating economic development:

the planning system and the role of the housing market;
the transport infrastructure;
school education;
lifelong learning;
the electronic infrastructure; and
the health system.

The Executive has a key responsibility in all of these matters, and a specific responsibility to identify the contribution that each makes to the fulfilment of the overarching economic vision. Indeed, the success of modern economies is closely related to the underlying progress in these areas.

Planning System

The land-use planning system guides the future development and use of land in cities, towns and rural areas through a process that respects the rights of the individual while acting in the interest of the wider community. The aim is to ensure that development and changes in land use occur in suitable locations. The Executive strategy is designed to balance competing and often conflicting demands to make sure that development is sustainable and beneficial to society, while avoiding harm to the long-term needs of people, the economy and the environment. The objectives of the planning system are:

to set the land-use framework for promoting sustainable development;
to encourage and support regeneration; and
to maintain and enhance the quality of the natural heritage and built environment.

The strategic approach. The devolved Scottish government's planning policy has an important role to play in supporting a competitive Scotland by deciding planning applications in an efficient and consistent manner on the basis of positive and up-to-date development plans. It indicates that planning authorities should provide a range of development opportunities, secure new development in sustainable locations, safeguard and enhance the environment, and promote dialogue between Local Authorities and business.

To retain and attract investment, we must support our areas of high environmental quality. There are, however, also parts in need of regeneration which, with co-ordinated investment, can realise their potential and contribute to a vibrant, confident Scotland. Key development, regeneration and infrastructure challenges - for example, in transport, water and drainage and affordable housing - are key areas which must be addressed to reduce the constraint on economic development that they can impose.

In April 2004, a National Planning Framework (NPF) to guide the spatial development of Scotland to 2025 was published. It complements the Framework for Economic Development in Scotland, highlighting the importance of place and identifying priorities for investment in strategic infrastructure to enable different parts of the country to play to their strengths in building a Scotland that is competitive, fair and sustainable.

The NPF identifies connectivity and environmental quality as crucial factors in achieving the Executive's objective of sustainable long-term economic growth. It reflects the commitment to supporting the development of Scotland's cities as the main drivers of the economy and identifies priorities and opportunities for different parts of the country in spatial perspectives for the Central Belt, East Coast, Ayrshire and the South-West and Rural Scotland.

Modernising the planning system. The planning system is in need of reform. There are particular concerns around planning delays and, in particular, the lack of up-to-date development plans. Scottish Ministers are committed to the reform of the planning system and the Partnership Agreement indicates that " we will improve the planning system to strengthen the involvement of local communities, speed up decisions, reflect local views better and allow quicker investment decisions."

Scottish Ministers will consider the outcome of all parts of the modernisation agenda and consider any necessary changes which will require primary or secondary legislation or policy guidance. Subject to other legislative priorities, it is likely that a Planning Bill will be introduced during the current session of Parliament.

Housing market. The housing market has a major effect on the economy and the planning system has an important role to play in ensuring that there is an adequate supply of land for housing. Demographic change is an important starting point but, in allocating land for housing development, account has to be taken of local needs assessments, market signals, environmental, infrastructure and amenity considerations. An inadequate housing supply, or poorly functioning housing market constrain economic growth, not only in respect of house building but also through the impact that a lack of available housing has upon the ability of businesses and labour to locate in the most appropriate areas.

Transport Infrastructure

The Executive's high-level transport objective focuses on promoting economic growth by enhancing the effectiveness of the transport network and reducing congestion, with an overarching target to strive to stabilise road traffic at 2001 levels by 2021. This will be achieved through investing in an integrated package of measures which include modernising and improving public transport, promoting alternative modes of transport to the private car, and targeted motorway and trunk road improvements. Importantly, the Executive strategy aims to stabilise road traffic levels, while at the same time supporting economic development. While, in general, markets provide the best means of allocating an economy's resources, transport is subject to some important market failures that, left to themselves, will lead to inefficient outcomes. In consequence, the Executive sees a key role here for public policy in securing a highly efficient transport system that can best promote economic development in its widest sense.

Since devolution, Scottish Ministers have developed a policy approach based on a major shift in the balance of public sector investment towards public transport and has shifted resources towards more sustainable transport options, while maintaining and enhancing the trunk road network and still supporting maintenance of the local road network through the support given to Local Government. Over coming years, the Executive strategy will have four principal elements that will address these priorities:

Improving transport planning and structural landscape. Scottish Ministers are consulting on proposals to create a Strategic Transport Authority focused on delivery and strategic planning. This new national body will be a Scottish Executive agency accountable to Ministers. By working closely with regional transport partnerships across Scotland, it will strengthen transport planning at the regional level and, by contributing to a strategic project review of all transport modes, it will help to develop a 10-year transport plan for the decade after 2010. Improvements in the strategic planning and delivery of major transport projects will ensure that our transport network continues to support future economic activities;
Investing in transport infrastructure. Future investment in transport infrastructure is central to supporting future economic development by reducing congestion, improving journey time reliability, and increasing the travel options available to both individuals and businesses. Consequently, the devolved Scottish government is committed to a major programme of investment to deliver a new transport infrastructure. The Executive also recognises the vital role that ports play in economic development and the need to ensure that they can meet future demands;
Tackling road traffic congestion in order to help to deliver reliable journey times for all road users. The Executive will support local authorities which wish to pursue road user charging in order to reduce congestion in their area. Improvements in sustainable transport can help to stimulate modal shift away from the private car towards public transport. In addition, targeted improvements on the motorway and trunk road network will deal with some of the critical congestion spots. The national awareness campaign is also raising awareness of travel issues, promoting public transport and can influence individual travel choices;
Improving services for all transport users. Supporting good services at affordable cost, through subsidised ferry and air services, will remain a priority because it is vital to maintaining and improving economic conditions in many rural and island areas of Scotland. The development of concessionary travel schemes for older people initially is increasing accessibility for large sections of society and further extensions to these schemes are planned. Pump-priming investment is being made available to stimulate the development of new bus and air routes to increase the accessibility of communities and access to the rest of the world. The tendering processes for the ScotRail franchise and the Clyde Hebrides Ferry Services are ways of testing the ability of the market to deliver better services for passengers .

School Education

Increasing productivity fundamentally rests on increasing the quality of human capital (traditionally understood to mean the knowledge and skills of individuals). Since formal schooling is one of several important contributors to the skills and knowledge of individuals, it certainly represents one direct mechanism through which the Executive strategy aims to enhance productivity and hence raise the long-run sustainable growth rate of the Scottish economy.

The National Priorities in Education were agreed in December 2002 and provide the strategic direction to school education. They define the high-level outcomes which educational authorities and schools have to deliver; foremost are those relating to:

Achievement and Attainment: to raise standards of educational attainment for all in schools, especially in the core skills of literacy and numeracy, and to achieve better levels in national measures of achievement, including examination results; and
Learning for Life: to equip pupils with the foundation skills, attitudes and expectations necessary to prosper in a changing society and to encourage creativity and ambition.

These priorities continue to promote the importance of traditional academic skills such as reading, writing and mathematics which are as important as ever in enabling young people to be effective users and creators of information. The priorities also reflect a new emphasis on:

modernising the school curriculum to equip children and young people with the additional skills required by the modern economy: for example, the fundamental computing skills, creative thinking and problem solving skills and a desire to continue to learn;
improving the quality of the teaching workforce and school environments;
increasing access to, and use of, ICT to take full advantage of the potential to improve the delivery of education and accelerate the rate of improvement of standards in school education;
promoting Enterprise in Education activities to prepare young people for the world of work and encourage a spirit of enterprise in later life;
helping every child to benefit from education by promoting equality, inclusion and diversity and reducing structural inequalities of opportunities, expectations and outcomes;
equipping children with values, morals, and citizenship.

Lifelong Learning

The Executive's approach to lifelong learning is founded on the understanding that a skilled and educated workforce is essential to productivity and economic growth. The effectiveness of capital investment is significantly influenced by the quality of the workforce and it is now widely recognised that the continual creation and adoption of new ideas lies at the heart of sustainable competitiveness. One key element of the Executive strategy is, therefore, to facilitate the development of a skilled and adaptable workforce capable of adjusting to changing circumstances and responding to new challenges in the global economy.

It is recognised that individuals and employers - left to themselves - will often have less incentive to invest in their training than is desirable for society as a whole. It is not individuals themselves who receive all the benefit of their own learning, just as individual employers themselves do not necessarily receive the full benefit of the learning they support. Moreover, individuals may find it hard to find financing for their own training and the inherent risk may deter many from taking full advantage of the available opportunities. The economy as a whole will, however, benefit significantly from individual efforts to increase skill levels, implying that this is an area where market failure does need to be addressed.

The Executive strategy for lifelong learning - Life through learning; learning through life - has five goals:

a Scotland where people have the confidence, enterprise, knowledge, creativity and skills they need to take a full part in economic, social and civic life;
a Scotland where people demand - and learning providers deliver - a high quality learning experience;
a Scotland where people's knowledge and skills are recognised, used and developed to best effect in their workplace;
a Scotland where people are given the information, guidance and support they need to make effective learning decisions and transitions;
a Scotland where people have the chance to learn, irrespective of their background or current personal circumstances;

The strategy will seek to improve the incentives to people to undertake learning activities by, for example, paying the tuition fees of eligible Scottish domiciled students to enable them to undertake full-time study to degree or equivalent level, providing Educational Maintenance Allowances for 16-19 year olds and introducing a new Individual Learning Account scheme. The Modern Apprenticeships will continue to form a key plank of the effort to address the market failures in the development of vocational qualification at the intermediate level. There will continue to be an emphasis on developing skills of people who are currently marginalised within the labour market, but who do have the capacity to undertake productive employment.

Electronic Infrastructure

The strengthening of the electronic infrastructure is important in ensuring that Scotland has a communications network that allows business and individuals to exploit the opportunities presented by access to the internet and to e-commerce. Broadband, in particular, is potentially one of the major facilitators of e-commerce in both new and old enterprises, offering access to major new market opportunities. Broadband can also support the provision of educational services and lifelong learning, with important implications for the quality of the economy's human capital. A well-developed electronic infrastructure, which is utilised to its full potential, is therefore a key objective for the Executive.

The Executive's approach is to encourage the market to work. In the urban areas it is generally the case that the market does operate satisfactorily, but there is a danger of a digital divide opening up between urban and rural areas. Connectivity is a key objective. The Executive is committed to extending broadband coverage to every area of Scotland, and will continue to address three key issues: accessibility, cost and demand. A range of programmes will be continued by the Executive - working with the Enterprise Networks - focussing especially on raising awareness of the potential benefits of broadband and stimulating demand, and assisting providers in installing and testing new technologies, where that is appropriate. In addition, the Executive will intervene with a procurement, subject to State Aids, to address both the lack of planned commercial coverage in specific areas in Scotland and the lack of reach of existing services. The aim of this intervention will be to ensure broadband access in every community in Scotland by the end of 2005.

Health System

There is little doubt that economic growth contributes to the improvement of health and that health itself is an important driver of economic development. Good health can boost productivity, while ill-health can impose significant costs on the economy in terms of lost working time, lost output, and less productive working time.

The Executive's approach to health is therefore of profound importance for economic development and competitiveness. The key health objectives are set out in Building a Better Scotland (2002): moving towards a step change in life expectancy; ensuring that providers can provide swift and appropriate access to health care; improving the patient's experience of the service provided by the NHS; and improving the services for old people, at home and in care settings. These objectives are complemented by the focus of Health in Scotland: the challenge (2003) on four pillars of health improvement - early years, teenage transition, the workplace and communities. There will be particular effort to improve occupational health services, to encourage people to remain in work wherever possible and to return to the labour force after periods of incapacity. Apart from providing health services, promoting the right culture and attitudes can have a significant impact on making Scotland a healthier place.

2.3 What will be contributed to the Development of the Enterprise Sector?⁶

Raising the competitiveness of Scottish-based businesses is a key aim. Establishing sustainable economic growth will only be possible if we have in Scotland enterprises that continually strive for competitive advantage in global markets. The encouragement of new businesses and of the growth of existing enterprises is an important objective.

Within individual enterprises, this process typically involves combining a concern for operational efficiency with the strategic positioning of the enterprise's outputs. The Framework is aimed at providing the economic environment that attracts new corporate headquarters to, and retains existing ones in, Scotland. Their presence is beneficial to the Scottish economy: they create high-quality employment and generate a strong demand for business services. While the ultimate decisions on where to locate corporate headquarters, and on takeovers and mergers, will lie with individual private companies, the Framework aims at widening opportunities for business and giving the right incentives for creating employment and entrepreneurship in Scotland. The Executive recognises the importance of retaining international business headquarters for reinforcing Scotland's reputation as an outward-looking and dynamic economy.

The global context. The economic environment in which enterprise development takes place is crucially important to the nature of the Executive's economic strategy. As the openness of the world economy has grown and the volume of international trade and capital flows has risen sharply - despite the impact of recent cycles and specific short-lived events - the prospects for the Scottish economy have become intimately tied to the development of the global economy and our ability to compete in both domestic and international markets. The realities of the global economy need to be understood and taken into account:

Scotland will not be able to compete on the basis of low labour costs. While costs in Scotland may be lower than those in some advanced economies, there are very wide disparities with many developing economies. Indeed, Scotland would not wish to compete as a low-wage economy;
Scotland's ability to remain competitive rests on the exploitation of the knowledge and skills of our people and of the knowledge to which we have access. Developing products and means of production that are superior to our competitors in the knowledge and research that they embody lies at the heart of our future prosperity. A culture of continual business innovation and risk-taking is critical to the sustainability of Scottish economic development;
even with an emphasis on knowledge-intensive products, Scotland will face strong competition from both advanced and developing economies. Both have very significant pools of highly skilled people with easy access to the pool of global knowledge - and the latter also have access to very cheap labour for decades to come. Scottish enterprises will therefore need to display great agility and skill in the identification of products and markets where our specific knowledge and skills can provide the competitive edge that is crucial;
with the greater mobility of enterprises and of the production of components for both goods and services, enterprises will often benefit from distributing production across several countries. We cannot expect enterprises to restrict their operations to Scotland if competitive advantage can be gained from exploiting the economic conditions in other economies. The strength of operations in Scotland, however, can be greatly enhanced by a strong global presence in both production and in sales;
as the complexity of production increases, enterprises will look to gain the benefits from corporate alliances of different types across the globe - be they formal mergers, joint ventures, licensing arrangements or loose alliances that allow the sharing of knowledge and innovative ideas.

The strategic priorities.FEDS focuses on how the Executive can contribute to the development of new and existing enterprises in the light of the global context. It looks to improve the operation of those market mechanisms that are inhibited by such constraints as a lack of information, a lack of finance, high levels of risk or the gap between the wider economic and social benefit from R&D and innovation and the return to the individual entrepreneur.

Research & development, and innovation. Research and development and access to a pool of existing global knowledge can have a significant effect on the development of enterprises. The application of knowledge in innovative ways unlocks competitive advantage. Capital investment plays a major role as a stimulant to innovation, technical progress and increased productivity. Those drivers of economic performance are at the centre of the Executive's approach.

The Executive's objective is to address the R&D gap by supporting programmes such as SMART, SPUR and SPUR+ that catalyze and support expenditure on R&D in small and medium enterprises and expenditure by researchers and prospective entrepreneurs. The development of R&D tax credits by the UK Government plays a valuable complementary role, those credits having been extended in 2002 to large enterprises and expanded again in March 2004 to encompass a wider range of R&D costs.

The Executive's Science Strategy has as one of its main aims the better harnessing of outputs from the science base in academic and government institutions, and additional funding has been directed to this end. Collaboration between universities and colleges and business is now a major driver of economic performance, as demonstrated across the world, and Scottish Ministers have taken a number of initiatives to promote this, such as the Enterprise Fellowship Scheme and the Proof of Concept Fund, which seek to support the commercialisation of research conducted in our higher education institutions. Two further programmes - SCoRe and SEEKIT - have recently been launched on a pilot basis. The establishment of three Intermediary Technology Institutes (ITIs) in 2003, focusing on market-based, pre-competitive research in areas of high potential, underlines the long-term commitment to generating greater business "pull" of ideas and innovation from universities and research institutions. The ITIs cover technology and digital media, energy and life sciences.

Entrepreneurship. The development of new enterprises is one of the prime drivers of economic growth. In the past, the number of business start-ups in Scotland has lagged behind the level deemed necessary for a dynamic economy, with problems of risk-aversion, a fear of debt and failure, a poor image of enterprise and business, and difficulties in raising finance all cited as factors in this relatively poor performance.

Following a review of its Business Birthrate Strategy, Scottish Enterprise introduced its New Approach to Entrepreneurship in 2002. This places greater emphasis on the contribution that the education system can make to the development of entrepreneurship, and on the role experienced entrepreneurs might play in delivering support to start-up companies. It also emphasizes the role that women and young people can play in stimulating new enterprise. Careers advice in schools will put more emphasis on business creation as a possible option, and specific start-up support programmes will target graduates from universities and FE colleges.

A range of programmes to support business creation and growth and entrepreneurial dynamism have been established, such as:

the Equity Investment package that addresses the equity gap facing small business, and includes the Scottish Co-investment Fund, the Business Growth Fund and the Investment Readiness Programme;
the Business Gateway, designed to bring greater consistency and quality of support for all businesses through a single point of contact. The Gateway is accessible throughout the Scottish Enterprise network area, with a similar service operating in the Highlands and Islands network area; and
the Enterprise in Education initiative, which seeks to build positive attitudes to the world of enterprise starting with school-aged children. The Executive's strategy includes the provision of annual enterprise activities for pupils from P1 to S6, work-based vocational learning opportunities for pupils over 14, and hands-on experience of business and enterprise activities for pupils in every school.

Managerial and employee skills. Increasingly, the dynamic competitiveness of enterprises in global markets lies in the knowledge and skills of their workforces and management. These skills include both the technical and softer skills necessary for effective business. Consequently, the continual enhancement of skills is a dominant theme of FEDS. The earlier section on lifelong learning reiterated this point and here we emphasize the strategy insofar as it relates to enterprises more specifically.

Management skills are obviously of high importance. A successful economy depends on highly skilled managers who have the knowledge and insights to make key decisions on investment, R&D, innovation and employee development. It is, however, also important that the school education system provides the basic raw material on which employers and others can build. The aim is to ensure that Scotland has a flexible skilled workforce that can respond rapidly to changing global pressures. A key element is to ensure that individuals have the information on which to take decisions about career options and development needs, and C areers Scotland, Futureskills Scotland and learndirect scotland will continue to have a major role to play in ensuring that happens.

Cultural activity. The economic benefits of culture are highly significant and the Scottish Executive's policy is to promote participation in the widest possible range of top quality cultural provision. Young people's exposure to cultural activity helps develop a range of important skills, equipping them for life and the world of work, such as self confidence, creativity and social skills. Scotland's business community is clear that those who emerge from formal education so equipped contribute to company development, growth and competitiveness. Consumption of culture and cultural products makes a substantial contribution to the economy; the economic impact of high quality cultural infrastructure is considerable and makes Scotland an attractive place in which to live and work.

The Global Connections Strategy. As was noted earlier, Scotland has to compete in the global economy and it has been recognised that success in the future will lie in levering advantage from a wide range of activities and interactions based around inward and outward flows of knowledge. There has, therefore, been a shift in the approach of the Executive and its agencies away from relying on foreign direct investment, with its heavy emphasis on manufacturing jobs, and the promotion of exports, to a broader-based approach which seeks to support a new range of international business partnerships built around the transfer of knowledge, technology, ideas, skills and people. It is recognised that internationalisation takes a number of forms:

knowledge out: taking Scottish knowledge, skills and ideas to the rest of the world, leading to more Scottish enterprises, organizations and academic institutions becoming global players through alliances, strategic partnerships, the interchange of technology and overseas trading and investment linkages;
knowledge in: bringing global knowledge, skills and ideas here, leading to more research, design and development, new technology partnerships and international venture capital, as well as direct investment;
people: promoting Scotland as a place to work, live and do business.

These themes, which are set out in the Global Connections Strategy, published in 2001, underpin activities in all relevant world markets, including the European Union.

The regulatory framework. The Executive has a responsibility to protect individuals, society and the environment, and will, therefore, maintain an appropriate regulatory framework. It is, however, also important not to impose unreasonable compliance burdens on individuals or enterprises. Where there is a need to regulate, the Executive will adhere to the key principles of good regulation: proportionality, transparency, accountability, targeting and consistency. In particular, the dangers of imposing a disproportionate burden on smaller businesses will be closely monitored and addressed as necessary.

The key instrument that the Executive will maintain in limiting the regulatory burden will be the Regulatory Impact Assessment which identifies the compliance costs to business of new policy proposals and considers these in the light of the anticipated benefits from the proposed regulation. The Improving Regulation in Scotland (IRIS) unit within the Executive will continue to seek to minimize the regulatory burden, complementing the work of the UK Government's Better Regulation Unit, which is also very important in the Scottish context in view of the significant regulatory responsibilities that are reserved to London. Equally, the Executive will work closely with local government in recognition of the impact on business of the latter's regulatory functions.

2.4 How will we establish Sustainable Economic Development?⁷

Although technological innovation and improvements in productivity can assist with the process of decoupling economic growth and resource use, in the longer term a sustainable future will require new and less wasteful ways of meeting the needs of Scottish society.

A key aspect of sustainable economic development is the drive for sustainable consumptionand production. The Executive shares the UK Government's definition of sustainable consumption and production (SCP) as:

Continuous economic and social progress that respects the limits of the Earth's ecosystems, and meets the needs and aspirations of everyone for a better quality of life, now and for future generations to come.

The Executive's sustainable production and consumption agenda provides a practical focus for these high-level concerns. The policy approach is to look across the whole chain of consumption and production in a particular field before deciding the points on which to focus. In practical terms, it means getting more from less:

more efficient and profitable production, using less raw material;
more value added to a product with less pollution and waste in the process; and
more consumer needs fulfilled with less energy, water or waste.

Economic development in Scotland has much to gain from making more efficient use of resources and from reducing the high costs imposed by environmental degradation.

The UK Government's framework and rationale for pursuing a sustainable consumption and production approach was set out in Changing Patterns in September 2003. The Scottish Executive shares the Changing Patterns framework and the challenge to identify the most efficient and effective way of decoupling economic growth from environmental degradation in Scotland.

In addition, the Executive's Green Jobs Strategy will look at resource productivity. It will help to identify enterprise opportunities in the development and manufacture of processes or products which facilitate better resource efficiency, while also supporting businesses in adopting greener working practices by encouraging greater resource efficiency and higher productivity. The Executive also has published 'Promoting more sustainable lifestyle practices: do a little, change a lot', which has been designed to raise awareness amongst consumers of the need to change personal behaviour and choices to achieve a more sustainable Scotland.

Renewable energyproduction is important to economic development in Scotland for three reasons - environmental, security and diversity of supply, and for the economic development opportunities it provides.

Scottish Ministers are committed to developing Scotland's very considerable renewable energy potential to the full. In March 2003, Ministers agreed that Scotland should aspire to generate 40 per cent of its electricity from renewable sources by 2020. This commitment has subsequently been incorporated in A Partnership for a Better Scotland. Developments in the regulation of energy markets in Great Britain could have implications for Scotland's capacity to further increase the proportion of electricity generated from renewables sources in the future. Ministers will therefore continue to seek sufficient flexibility in the regulatory framework to ensure consistent growth in this key sector for Scotland.

Securing a Renewable Future: Scotland's Renewable Energy recognised that the Executive alone cannot grow a new industry in Scotland or dictate the pace at which technologies, such as wave and tidal power, will mature. Further progress depends on the continued commitment of developers, national agencies, local authorities, academia and crucially, the financial sector. The Executive's role is to provide leadership and to create an environment which supports and promotes innovation and enterprise. A number of policies have been put in place since 1999. In particular, the Forum for Renewable Energy Development in Scotland (FREDS), which is chaired by the Deputy Minister for Enterprise and Lifelong Learning, brings together industry, academia and government, with the aim of enabling Scotland to capitalise on its renewable energy resource and secure significant economic development opportunities for Scotland. The first major output from FREDS was the publication, in July 2004, of the Marine Energy Group Report Harnessing Scotland's Marine Energy Potential which suggests that by 2020 10 per cent of Scotland's electricity production could come from wave and tidal resources.

Investment in upgrading and extending the existing electricity network will be crucial to the development of renewables in Scotland as well as securing reliable energy supplies in future years. This is why, despite the responsibility for network matters being a reserved matter, we are working closely with the UK Government, the regulator and the network owners to assess the implications of our renewable energy aspirations for the GB electricity network, develop the case for new power connections from the Highlands and Islands to the major centres of population in the most rational way, and co-ordinate the development of the necessary supporting work. As a result, the regulator (Ofgem) has recently announced new proposals to allow additional investment - initially some 360 million - in the Scottish electricity network.

2.5 How do Demographic Trends impact on FEDS?⁸

Implications for Development

Population decline will tend to reduce economic growth if less labour is actively engaged in production. Since economic prosperity is certainly promoted by a strong and growing domestic market in which domestic enterprises can build a firm operational base, measures which seek to halt and ultimately reverse the decline in the population can have a positive impact on economic growth.

It is also important to emphasise that, apart from overall population numbers, the structure of the population and especially its age and skill profile are important determinants for the composition of the labour force and employment trends. Moreover, the labour market itself will respond to demographic changes.

Scottish Ministers' aim is to reverse the population decline and continue to maintain the necessary skills within the Scottish labour force.

Population ageing lengthens the time an individual can participate in the labour market and contribute to the economy. At present, however, attitudes, habits, and institutional obstacles make it hard to realise this opportunity. To contribute effectively, workers have to engage in lifelong learning and keep their skills up to date throughout their careers, a need recognised by the Executive's commitment to a lifelong learning strategy. Ageing does not pose a fundamental problem to economic development if workers and employers seize the opportunities to meet this challenge. The responsibility to deal with this demographic trend primarily lies with the private sector, but the Executive has a role in facilitating the transition to new patterns of work that take account of an ageing workforce, by making sure that people have access to information and learning opportunities.

The Demand for a Skilled Workforce and Fresh Talent

A modern economy can only compete if employers have access to a skilled workforce. The projected demographic trends in Scotland mean that there will be fewer young people entering the labour force, thus reducing the supply of skills. The Executive's Fresh Talent Initiative, announced in February 2003, sets out to counter the effects of population decline through greater retention of people and in-migration.

Its objectives are:

to encourage people to think about coming to live and work in Scotland, as well as supporting efforts to retain people already living in Scotland who wish to begin, or to further, their careers in Scotland;
to attract talented individuals to consider Scotland as a relocation destination;
to help achieve the vision of Scotland as a safe, open, tolerant society offering people an attractive lifestyle; and
to help Scotland's economic performance and add to the diversity of its population.

The immediate targets are:

to increase the proportion of non-Scottish students who stay on to live and work after graduation; and
to bring our share of UK work permits into line with our share of UK population.

In order to attract Fresh Talent to Scotland, we have to look at policies across the Executive, but we have to focus especially on the impact that a vibrant culture can have on making Scotland a first choice for talented people from abroad.

2.6 How will we achieve our Social and Regional Objectives?⁹

The Framework looks to build up economic activity throughout Scotland by promoting skills, enterprise and innovation everywhere. However, beyond this, there may be a need for targeted regional interventions to promote more balanced growth and social inclusion. Encouraging economic dynamism throughout Scotland should improve both the size of the national economy and the relative distribution of regional shares in wealth and employment creation. Given that, in global terms, Scotland is small enough to be promoted as a single region, it is important to highlight this perspective rather than the perspective of constant and at times negative competition between Edinburgh and Glasgow or between the Central Belt and rural areas.

Regional Development within Scotland

Resource endowments and economic legacies vary across Scotland, which means there are different development challenges. Some local economies are overheating, with pressure on skilled labour supply and traffic congestion. In other areas, traditional industries are in decline, with business and public services suffering from a loss of critical mass. Regional intervention to reduce the local constraints on economic adjustment and dynamism can help to address such challenges.

Traditionally, regional policy in Scotland (and throughout the UK) was founded on intervening in under-performing areas or regions to reduce geographical disparities, particularly in unemployment, and improving the overall economic performance of the region and economy. This underlying objective remains broadly as before but the range of policy instruments employed by the Executive has changed significantly over the last 20 years.

The range of policy instruments goes beyond providing aid to firms to encourage investment and employment (regional selective assistance). Structural Funds Programmes support a number of activities including infrastructure investment, support to small manufacturing enterprises and skills training as well as policies to support social objectives.

The degree (and level) to which these policies can operate across different geographical areas is determined by European Union regulations, which reflect the EU policy goal of promoting economic and social cohesion across Member States. Moreover, the extent to which support can be given to the private sector is governed, to some extent, by the coverage of the assisted area maps within regions. The current maps were determined on the basis of the performance of different spatial areas, using a range of indicators, relative to the EU average.

Rural Development

Since much of Scotland is defined as rural, regional development and rural development become synonymous in many areas. Whilst the latter is often viewed in the context of support to traditional primary industries, the European Commission has already signalled (for example at the second European Rural Development Conference in Salzburg in November 2003) a desire to reformulate its approach to rural development by broadening the scope for support and rationalising funding streams. This coincides with EU enlargement, which is likely to reduce Structural Funds receipts in Scotland, and reform of the Common Agricultural Policy, which is likely to alter the purpose and payment mechanism of farm support. These changes pose challenges, but also opportunities for regional intervention.

In the context of encouraging and promoting economic development in the currently less prosperous and more peripheral parts of Scotland, the Executive is seeking to foster the wide range of communities and to promote equality of opportunity. Rural development is supported by a vibrant culture that enhances the quality of life for people living across Scotland and helps to retain people in rural areas. Furthermore, interventions, such as Regional Selective Assistance or the smaller Processing and Marketing Grants, and support for tourism development promote opportunity, by encouraging investment, employment and productivity. Equally, other initiatives seek to improve the capacity of communities to self-organise to identify local priorities and access government assistance. In such cases, regional measures, underpinned by spatially disaggregated data, play a key role in targeting and reducing disparities, and delivering economic growth across all of our regions.

The Cities Review and Regeneration

Cities are central to the quality of life and well-being of Scotland. The evidence base provided by the Review of Scotland's Cities has allowed us to conclude that:

our cities are at the centre of Scotland's economic growth and dynamism;
whilst each city is unique and individual, each has a key strategic role to play in the growth and dynamism of the City-Region that surrounds it;
the attractiveness of our cities as places to live, learn, work and visit is crucial to their economic and social prospects;
rapid growth needs careful management to maximise the benefits of cities' success; and
some difficult, long-term problems remain - particularly those caused by de-population and vacant and derelict land.

Alongside the Review of Strategic Planning and the Community Regeneration Statement ( Closing the Gap), the Cities Review has brought a new spatial perspective to the policy arena in Scotland. This is evident in many areas, but most particularly in the following:

the development of Community Planning as an over-arching framework for linking priorities and working across institutional and local boundaries;
the modernisation of the development planning system, strengthening the arrangements for setting infrastructure priorities at national, City-Region and local level;
the devolved Scottish government's Partnership Agreement commitment to develop effective delivery partnerships for regional transport - to ensure that people throughout Scotland can benefit from the opportunities created in our City-Regions; and
the emphasis placed by Scottish Enterprise on the need for competitive business locations (competitive place) - recognising the case set out in the Cities Review for Scotland's City-Regions as the engines of our economy - and linking this to opportunities that can be exploited through integrated regeneration projects.

Collectively, our cities have a vital strategic role in Scotland's economic and social development; individually, each city is key to the success of its hinterland.

More widely, the Executive is addressing area regeneration needs across all of Scotland's most disadvantaged communities. People in those areas are being supported so that they can benefit from employment opportunities, including those created by major regeneration projects. Raising economic activity rates in these areas can contribute to the productive potential of the economy as a whole. Closing the opportunity gap in this way can make a real contribution to economic growth.

Housing policy

Although the population of Scotland is projected to decline, household numbers are projected to increase. The average household size would therefore decrease, while increased life expectancy means that households will, on average, become older.

The private housing market can generally be relied upon to respond to changes in housing demand, but there is growing concern in Scotland that in particular locations not enough housing of the desired type is available. The upward pressure on house prices has been boosted by the strong economic performance and low rates of interest, unemployment and inflation. The Executive recognises that the efficient and effective operation of the housing market is an important element in growing the economy. In some areas of Scotland insufficient housing of all types and tenures could be limiting economic growth. In response, the Executive is undertaking a review of housing affordability and considering issues such as:

housing supply/demand imbalances, including the roles for the different tenures;
options for increasing the supply of land for housing;
extent, methods and effectiveness of public expenditure on housing;
land allocation in development plans; and
other possible delivery mechanisms through the planning system.

In the social rented sector, the Community Ownership initiative addresses issues of housing quality, provides funding for housing investments and ensures that the tenant remains central to the decision making process. Large-scale voluntary stock transfers of local authority housing to Housing Associations have recently been completed in Glasgow, Dumfries and Galloway, and Scottish Borders, with the devolved Scottish government's Partnership Agreement outlining a further commitment to transfer 70,000 houses to community ownership by 2007, subject to approval by tenants.

The recent introduction by the Executive of the Scottish Housing Quality Standard (SHQS) requires all local authority and housing association stock to meet the SHQS by 2015.

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