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Background Analysis to the Framework for Economic Development in Scotland

10. The Social and Regional Framework

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.

10.1 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. The Executive is seeking to foster a range of communities and to promote equality of opportunity. Regional Selective Assistance or the smaller Processing and Marketing Grants, as well as support for tourism development, promote opportunity, by encouraging investment, employment and productivity. 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 good local information, can target and reduce disparities, and deliver economic growth across the country as a whole.

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.

It is important to note that the aim of regional interventions is not to maintain historical patterns of economic activity by resisting economic forces. Rather, the objective is to promote economic activity that secures sustainable development, thereby supporting regional communities. This means that jobs, villages, towns and cities may change, but the broad pattern of regional communities will be maintained: the Framework acknowledges and works with the realities of economic transformation but, nonetheless, looks to preserve a regional prosperity throughout Scotland. The design of regional interventions policy - and, indeed, the basic design of the delivery mechanisms for policy, as embodied in the regional strengths of the Local Enterprise Networks of Scottish Enterprise and Highlands and Islands Enterprise, in the local expertise of the Local Authorities, and direct interventions by the Scottish Executive - will take these principles fully into account whilst pursuing the aspiration of balanced growth.

Regional Policy in Scotland

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 improve 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.

Future Regional Policy - Potential Changes?

With the forthcoming enlargement of the EU to 25 members, and expiry of the regional aid guidelines at the end of 2006, the existing assisted area maps are set to be re-drawn for 2007. Early indications suggest the proposals for regional aid post-2006 may impact on Scotland, and the European Commission is expected to issue these for consultation during 2004. These proposals, if implemented, look likely to reduce the scope for regional based interventions post-2006..

Finally, the European Commission's Third Report on Economic and Social Cohesion, published on 18 February, outlines the Commission's views on the future shape of EU regional policy. The Scottish Executive has set up an Analytical Working Group on behalf of the Scottish European Structural Funds Forum to consider the implications for Scotland of this Report.

The Commission is expected to publish formal proposals for the future of the Structural Funds post 2006 in July 2004. This will then be followed by some 18 months of negotiation among Member States before the Council of Ministers adopts reform proposals in late 2005 or early 2006.

10.2 The Cities Review and Regeneration

Cities are central to the quality of life and well-being of Scotland. We are committed to ensuring that our cities are able to exploit to the full their economic potential, and that the benefits of their increased prosperity are shared with the rest 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.

The Executive's new framework policy for Scotland's cities - Building Better Cities - is based on a long-term strategy of helping competitive regions to grow. Since its publication in January 2003, it has been a catalyst for substantive and innovative action by the city local authorities and their Community Planning partners. Each of Scotland's six City-Regions now has a clear and constructive City-Vision for the next ten years, endorsed by local communities, stakeholders and the Executive.

The Cities Review highlighted concerns - particularly from the business community - that capital investment was lagging behind development: rapid business expansion had created bottlenecks in infrastructure provision, thereby endangering future development. Increasing evidence had been identified of a city investment shortfall, despite cities' proportionately greater needs (as economic and cultural centres, and as transport nodes), with consequences in terms of delayed or frustrated developments, traffic congestion and urban 'sprawl'.

The Cities Review included a detailed study of the complex patterns of public funding which support each City-Region and recommended the creation of a Cities Growth Fund as 'pump-priming' funding to tackle some of the problems associated with the city investment backlog: the Growth Fund now provides Scotland's six cities with a dedicated source of infrastructure investment to support successful and dynamic City-Regions. Over the period 2003-06, the Fund will provide some 90 million of new money. The Cities Growth Fund is beginning to make a visible difference to the quality of the urban experience in each of Scotland's six cities - turning each City-Vision into reality. Projects supported by the Growth Fund reflect local priorities determined by each city's Community Planning Partnership and which will be revisited throughout the life of the ten-year City-Visions. In parallel, a 20 million Vacant & Derelict Land Fund (2004-06) has been established to target areas with a particularly high proportion of brownfield sites - in Dundee, Glasgow and North Lanarkshire.

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 Executive'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. Our policies are designed to ensure that Scotland is a country of successful, competitive and dynamic City-Regions, where each city is characterised by a forward-looking, connected perspective that spans the entire City-Region and beyond. And if they are to succeed internationally - and, above all, in an expanded European Union - our cities must collaborate to compete for investment, new talent and innovation.

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.

10.3 Housing and the Barker Review

While the population of Scotland is projected to decline into the medium term from its current level of around 5.1 million, household numbers are projected to increase. The average household size would therefore decrease, while increased life expectancy will mean households will on average become older. The growing and evolving nature of housing demand in Scotland will present a number of supply-side challenges into the future.

The private housing market can generally be relied upon to react to changes in housing demand, desired location, and consumer valuation of the various attributes of housing - not only the physical characteristics of size and numbers of rooms, but also the neighbourhood and service provisions at each location. There is, though, a growing concern in Scotland that in particular locations not enough housing of the desired type is available or being built.

The standard market response to increased demand and rising (house) prices would be for more land to be made available for housing until the value of land under the different uses was equalised. However, because housing imposes externalities on society (such as environmental degradation, loss of amenity and transport congestion) the planning system has an important role to play in ensuring that these wider societal costs are taken into account in the decision-making process. Development plans have a vital role in delivering policy. Currently they do not always provide up-to-date and relevant guidance for housing. Around 70 per cent of plans were adopted more than 5 years ago, and the average age is just under 10 years. The Executive recognises the negative impact out-of-date plans and other planning issues can have on the economy and is in the process of reforming the planning system.

The upward pressure on house prices from the constrained housing stock has been boosted by a strong economic performance incorporating low rates of interest, unemployment and inflation to the point where more first-time buyers and people on lower incomes are being priced out of particular parts of towns and cities. This is important because restricting household choice affects labour mobility which in turn means businesses might be unable to optimise their labour requirements. This will affect profitability and possibly viability of the business to the detriment of the economy as a whole. 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;
• other possible delivery mechanisms through the planning system.

While issues surrounding the economic value of new housing are important it should be remembered that new housing only adds around 1 per cent (gross) to Scotland's housing stock each year. Questions of sufficiency or quality can arise across all housing irrespective of location, age or tenure and can reduce the potential output of the economy. To that end the review mentioned above has examined housing issues in the social rented sector as well as the new build owner occupied sector. The social rented sector has, in addition, benefited from a number of other funded programmes. The Executive policy of supporting councils to transfer houses into Community Ownership addresses a number of issues such as encouraging greater tenant participation and influence in the provision of housing; improving housing quality; rectifying under-investment; improving asset management (management and maintenance); and creating less uncertainty over affordability (i.e. promoting rent stability) for tenants, many of whom are often in lower paid employment or claiming benefit and therefore in or vulnerable to benefit traps. Large-scale voluntary transfers of stock totalling 100,000 homes were completed in Glasgow, Scottish Borders and Dumfries and Galloway in 2003. The next target is to implement the Partnership Agreement commitment of transferring a further 70,000 homes into Community Ownership by 2006, subject to the approval of tenants.

A parallel development was the introduction of the Scottish Housing Quality Standard (SHQS) in early 2004 and the requirement for all social housing in Scotland to meet the Standard by 2015. Transfers to community ownership are an extremely effective means of council housing meeting the Standard by 2015. This is in part because HM Treasury will (as in the previous 3 transfers) redeem debt associated with the houses, thus allowing the new landlords' resources to be ploughed into investment rather than debt servicing. So far as the remaining social rented stock (whether in local authority or housing association hands) is concerned, all social landlords have been asked to complete Standard Delivery Plans (with local authority plans to be based on robust option appraisals) by 29 April 2005 that will lay out their expected investment requirements and available resources to meet the SHQS by the target date of 2015. Communities Scotland will take the lead in assessing these plans from April 2005 onwards. A key consideration for councils will be whether a transfer of the houses is necessary to deliver the required level of investment i.e. whether or not a local authority can raise sufficient resources to invest in its stock using the recently introduced local government 'prudential' financial framework.

Existing private-sector housing can impose externalities on society in a number of ways. Private housing which is sub-standard or in poor condition can have a social and health cost for its occupants. It can also, particularly when clustered together, have a (detrimental) knock on impact on the quality of housing and services of the wider neighbourhood. The Executive is keen to bring about higher standards in these houses, not only to improve them in their own right but also to prevent any wider decline. It has considered in depth the mechanisms for achieving this through the work of the Housing Improvement Task Force. Responsibility for housing standards in the private sector lies with owners, but government can take action to encourage, assist or enforce repairs and improvements where appropriate. Local authorities are the main route for such action and their Local Housing Strategies are required to cover all sectors including the private sector. Local authorities' action in this area is funded by direct grant from the Executive, providing a lever and a means of monitoring to ensure delivery against Executive policies.

Because there is the possibility of information failure - i.e. home owners not being aware of the opportunities and funding available to them to improve their houses - the intention is to give easier access to loans and to practical help where there are barriers that obstruct owners wishing to carry out work. Where owners are unable to afford necessary works, assistance can extend to supported lending or to subsidy in the form of grant. Assistance provided in this way will be complemented by measures in the Tenements (Scotland) Bill that will help owners overcome problems in organising works which are a common or shared responsibility. These measures will address the problem of individual households who refuse to meet their responsibilities imposing economic costs on others who use the common facility (e.g. stairwells and lighting).

In the private rented sector, the Executive is addressing problems of imperfect information and providing incentives for good letting practice by piloting local voluntary accreditation in which local authorities and the private letting industry co-operate to establish schemes that recognise good practice in letting. Registration of private landlords, introduced by the Antisocial Behaviour (Scotland) Act 2004 will, when it is implemented, provide sound information on the sector and ensure that landlord and agents are fit and proper. At the highest-risk end of the sector, houses in multiple occupation require to be licensed as meeting defined physical and management standards.

Homelessness is an issue that affects many areas of Executive policy but the availability of appropriate housing is key to a household holding down a job or access training opportunities from which employment is likely to follow. Thus housing is a fundamental requirement for any long-term contribution to the economy.

The Barker Review⁵⁴

The remit of the Barker Review of Housing Supply was to identify the issues underlying the lack of responsiveness of housing supply in the UK and, where appropriate, offer options to address them. One of the findings the report was that the long-term upward trend in house prices and recent problems of affordability provide strong evidence of an overall housing shortage in the UK. This housing shortage had consequences for the economy as a whole and work commissioned by the Barker Review estimated that the UK economy lost between 8-15 billion through its unresponsive housing market.

Central to the final recommendations were a number aimed specifically at addressing the lack of responsive from housing supply to changes in demand. Further recommendations set challenges to the construction industry to raise productivity levels and increase customer satisfaction levels. The recommendations also suggested some minor changes to the tax regime.

Building on this work, the Executive has undertaken a parallel investigation of the Scottish housing market at the national and sub-national level. The analysis suggests that while many housing issues are common across the UK, those in Scotland tend not to be of the same magnitude or of the same extent. On the question supply the national picture suggests that Scotland is building sufficient houses to keep up with demand. However, because these houses are not always of the correct type or in the correct location certain areas have seen prices rise sharply.

Looking at house prices, the Barker Review found that prices in the UK have risen on average by 2.5 per cent per annum in real terms over the last 30 years. Similar analysis conducted by the Executive for Scotland suggests the rate of increase here has been just 1.5 per cent. Price changes have also been less volatile in Scotland with the consequence that the economy has not suffered the same reduction in economic activity associated with sharp adjustments in house prices. ⁵⁵

The findings from both pieces of research have helped inform the review of Scottish housing need and affordability highlighted above

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