The Council of Economic Advisers has been created to advise the First Minister on how to improve Scotland's sustainable economic growth rate. The Council meets on a quarterly basis and the minutes of its meetings are released within weeks of a meeting taking place. The fourthCouncil meeting is scheduled for 03 October 2008.
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MINUTES OF THIRD MEETING - 13 JUNE 2008 - UNIVERSITY OF GLASGOW
Introductions, minutes & actions arising
1. The Chair welcomed all members of the Council and Fiona Hyslop - Cabinet Secretary for Education and Lifelong Learning - to the third meeting.
2. The Chair referred members to the minutes and matters arising from the second meeting and, in particular, the CEA's recommendations on planning. The Chair noted that these had been published in a press release issued directly after the second meeting and requested an update on what the Scottish Government was doing in response to these recommendations, specifically those that related to changing the culture and goals of the planning system and to the incentivisation of sustainable local development.
3. John Swinney - Cabinet Secretary for Finance and Sustainable Growth - noted that he would be meeting with key stakeholders before the summer recess to see what can be done individually and collectively to accelerate the pace of reform, increase the efficiency of the planning system and ensure that the goals of the planning community are sharply focused on the Government's Purpose of increasing sustainable economic growth. A major summit will be held in autumn 2008 to set out the Government's aspirations for a modernised planning system and how they are to be delivered. John Swinney also informed the Council that work is underway to look at ways of incentivising sustainable local development.
4. The Council welcomed these developments.
Achievements/Highlights since the second meeting
5. The First Minister noted the dramatic change in economic conditions since the Council first met in September 2007 and described the impact the credit crunch and increasing energy costs are having on the Scottish economy. He stated that the challenge for his Government, and Scotland as a whole, is to ensure that we keep ahead of the curve and ensure that Scottish families and businesses are protected from the worst impact of any downturn. He set out a number of actions that could be taken to enhance Scotland's position in the short term including: identifying new sources of capital; accelerating capital developments; engaging with key inward investors; using Homecoming 2009 (250th anniversary of the birth of Robert Burns) as a vehicle to attract new visitors and present Scotland as an ideal location for investment; and, announcing the Saltire Prize (one of the biggest international innovation prizes in history - a £10 million prize for advances in clean energy). The First Minister welcomed the Council's views on these and other actions that could be taken to enhance Scotland's economic position in the short term.
6. The Council stressed the importance of accessing alternative channels of finance more efficiently and directly, and hence in moving quickly to create a different structure of arranging finance for long term infrastructure projects. The Council felt that it should provide a view on this question and agreed to prepare a paper setting out its recommendations, with a view for inclusion in the Council's first Annual Report (due to be published by the end of the year).
Update on the Scottish economy
7. The Chair invited Dr. Andrew Goudie, the Chief Economic Adviser to the Scottish Government, to provide an update on the Scottish economy.
8. Dr Goudie began by giving an overview of the global economic context within which Scotland is currently operating and highlighted the uncertainty that exists following the major shock to the global economic system, brought about by the credit crunch and the rapid rise in commodity prices. He then considered how affected/resilient the Scottish economy has been in the face of these impacts.
9. To illustrate the rapid deterioration in the global economic situation, Dr Goudie presented the substantive downward revisions that the IMF have made to their US GDP growth forecasts for 2008 (falling from 2.8 per cent as forecast in April 2007 to 0.5 per cent in April 2008) and a selection of the global imbalances that have been at the heart of the global shock/turbulence, including excessive global savings relative to investment demand and the collapse in the ratio of US savings (from over 10 per cent in 1984 to zero in 2008). Dr Goudie highlighted the fact that the re-emergence of global inflation - through the rises in the price of food and Brent Crude oil - is now starting to feed through to UK inflationary expectations (rising from 2.5 per cent in 2006 to 4 per cent in 2008) and that consumer confidence in the US is now at its lowest for 27 years and its lowest for 13 years in the UK.
10. Although no open economy is immune to these global developments and many key indicators operate with a significant lag, Dr Goudie noted that, on some indicators (labour market, retail sales, house prices, exports, recent GDP growth and forecast GDP growth), Scotland is - at this time - showing an encouraging degree of resilience relative to the UK. The latest quarterly employment figures, for example, show Scotland's labour market continues to outperform the UKs, with higher employment, lower unemployment and higher activity rates. Although the employment rate in Scotland appears to have flattened out, employment in Scotland increased by 8,000 to 2,547,000 over the past quarter; this is higher than the current UK average and amongst the highest in the EU-27. Further, while Scotland has witnessed a significant downturn in the property market, this is less marked than the UK as a whole and, with lower house price-earnings ratios, Scotland should experience a more gentle correction than the rest of the UK.
11. Dr Goudie also highlighted the weaker aspects of the Scottish economy - falling consumer and business confidence, reduced business activity and government expenditure (previously a significant contributor to GDP growth) growing at a much slower rate than in previous years. Dr Goudie concluded by noting that the outlook for the Scottish economy depends on the interactions between the resilient and weakening indicators, in particular the extent to which falling business and consumer confidence will be maintained and start to impact on retail sales and the labour market.
Developing Scotland's Comparative Advantage
Education, Skills, Lifelong Learning and the Government Economic Strategy
12. The Chair invited Fiona Hyslop, Cabinet Secretary for Education and Lifelong Learning, to set out the contribution of education and skills to economic growth in Scotland.
13. Fiona Hyslop stated that her task is to ensure that the Scottish education system reflects the needs of individuals and the needs of Scotland as a whole. She noted that although Scotland has a high skills level (evidenced by Scotland's strong performance in international benchmarking exercises on skills and qualifications) and a relatively high level of spend on research, this has not resulted in higher productivity. Fiona Hyslop set out the Government's 'cradle to grave' approach to Skills contained in the Skills Strategy and raised a number of questions that the Government needs to address to ensure that the Skills Strategy and the education system generate outcomes that are more closely aligned with the Government's Purpose of increasing sustainable economic growth. She welcomed the Council's views on the Government's approach and the specific questions raised, including how to increase the impact of research spend on economic performance and improve the demand for, and the utilisation of, skills.
14. Fiona Hyslop then set out the particular challenges facing the Higher Education sector. She described the strong collaboration that is currently taking place between the Scottish Government and Scottish universities through the work of the Joint Futures Taskforce (chaired jointly by the Cabinet Secretary and the Convener of Universities Scotland, Sir Muir Russell). This was set up in recognition of the substantial contribution which Scottish universities make to the Scottish economy and need to optimise and shape this contribution. Fiona Hyslop noted that the Taskforce would be reporting shortly and that this report would set out a new framework for the Scottish Government, the Scottish Funding Council and universities. Fiona Hyslop identified Scottish universities as a distinct source of comparative advantage to the Scottish economy and proposed that they should be given a particular sectoral profile as part of the Government Economic Strategy (GES).
15. Fiona Hyslop concluded by describing the initiatives that are underway to attract talent to Scotland and capitalise on Scotland's popularity with international students.
16. The Chair invited the CEA discussant for this session to lead the Council's response to the issues raised by Fiona Hyslop.
17. The discussant started by recognising that Scotland has an excellent education system and that the Scottish Government is committed to improving it. The discussant noted that all of the questions raised centre on the issue of productivity and why, with a high level of skills and relatively high level of spend on research, Scotland does not perform better.
18. The discussant raised a number of issues for the Scottish Government to consider:
- Have recent reviews looked at the Scottish education system in terms of the 21st century where people are going to live to 80+ and live through continuing change? - this has implications for the skill set (general versus specific) that should be provided in further and higher education;
- Whether the system balances the personal and business needs of Scotland appropriately - this is an issue which needs attention;
- Whether the education system overall is heterogeneous enough to meet the needs of a diverse student population - permitting excellence and equality to coexist;
- If the incentives of colleges, academics and business are conducive to having strong links between research and economic performance;
- If knowledge transfer is poor, does this reflect the fact that business cannot absorb the skills/knowledge or that the training of graduates does not prepare them well for modern business?
19. The discussant noted that Scotland has been strongly committed to equality in its approach to education and asked if there was any sense that greater access had been achieved at the expense of quality.
20. The discussant stressed that the key challenge is to get students to commit to their own education.
21. A wide ranging debate then followed on the links between fees, the level of participation, skills and productivity. There was general agreement between Council members that there is a sharp contrast in the attitude and level of commitment between those students who are paying for their education and those that are not and that the Scottish Government should look at ways of ensuring that students see education as a personal investment. The Council noted that students were making a substantial financial contribution to the costs of supporting their education in Scotland.
22. The Council agreed that there would be value in identifying universities as a distinct source of competitive advantage in the GES. Some Council members noted that this should not be viewed as a route to additional public funding.
23. A number of other subjects were also discussed, including:
- the contribution universities make to the economy through research and the need to align the goals of the Scottish Funding Council with the wider growth agenda set out in the GES;
- the need for undergraduate courses to be more general;
- the need to incentivise students to study maths and science;
- the need for the education sector to play a full part in Homecoming 2009.
Council's initial recommendations on education
24. The Council recommended that the Scottish Government should:
- look at ways of ensuring that students see education as a personal investment;
- give a particular sectoral emphasis to universities as part of the GES;
- collaborate with universities and business.
25. The Council agreed to prepare a paper setting out more detailed recommendations in relation to education with a view to inclusion in the Council's first Annual Report.
Promoting Short Term Economic Growth over the life of this Parliament
Achieving Scotland's 2011 targets on emissions and growth
26. The Chair invited John Swinney, Cabinet Secretary for Finance and Sustainable Growth, to lead a discussion on achieving Scotland's 2011 emissions target and 2011 growth target.
27. John Swinney noted that the Scottish Government is already doing a great deal to impact on the achievement of its two 2011 targets and that aligning the achievement of both growth and emissions is central to delivering the Government's overarching Purpose of sustainable economic growth. He also stressed that the action we take now and in the very near future must not only be capable of producing results by 2011 but also be compatible with, and supportive of, activity to achieve the longer term targets.
28. John Swinney noted that as things stand, it is likely that Scotland can achieve its 2011 emissions target, albeit there remains considerable uncertainty surrounding the estimates available. Importantly, however, the projections indicate that the reduction likely to be achieved by 2011 is not sufficient to secure the average downward trajectory required if Scotland is to meet its 80 per cent reduction by 2050. Additional action is therefore required to ensure Scotland meets its longer term emissions target.
29. John Swinney then focused the Council's attention on the 2011 growth target and on a series of policy proposals which have the potential to accelerate growth in the short term while contributing to sustainable economic growth in the longer term. He noted that the policy proposals presented reflected the suggestions which the Council had made on how best to achieve the 2011 growth target at its last meeting and those which Council members had sent in subsequently.
30. This session had two CEA discussants - one to lead the discussion on the emissions target and the other to lead the discussion on the growth target.
Achieving Scotland's 2011 emission target
31. The discussant on the emissions target welcomed the fact that the achievement of the two targets was being considered in tandem and agreed with the assessment that Scotland is likely to achieve its 2011 emissions target. The discussant stressed that it will be much tougher to meet the 2050 emissions target and referred the Council to the costs and abatement potential of a range of different technological options. The discussant urged the Scottish Government to stimulate a more active debate on this issue.
32. The First Minister responded by identifying the areas where Scotland has an international comparative advantage. He noted that because of Scotland's geography, Scotland has a comparative advantage in alternative energy technologies, carbon capture and even in solar. Scotland has an estimated 25 per cent of Europe's potential marine technologies (off-shore wind, tidal and wave). As a result, Scotland is well placed to become an international leader in alternative energy technologies. This not only offers significant opportunities for growth but provides a way of moving Scotland to a low carbon economy.
33. A lively and comprehensive debate followed on the relative costs of all alternative technological options available to reduce emissions. It was agreed that in order to move the debate forward, an honest, careful and balanced assessment of the full costs associated with each of the key energy options was required. The Council also recognised the important role of energy efficiency measures and considered the actions that Scotland should take to increase the adoption of these measures.
Council's recommendations on the emissions targets
34. The Council advised the First Minister to:
- commission external consultants to conduct an assessment of the costs of various energy options which could then be reported back to the Council;
- explore options for reducing the up front capital costs of energy efficiency measures - perhaps through a system that allows consumers to pay back the capital costs over a number of years - with energy companies and banks.
Achieving Scotland's 2011 growth target
35. The Chair invited the second CEA discussant to comment on a series of policy proposals that had been presented as having the potential to accelerate growth in the short term while contributing to sustainable economic growth in the longer term. The discussant reviewed each of the proposed policy propositions in turn and made a number of additional suggestions on actions that ought to be taken to support delivery of the 2011 target. This included continuing to develop the focus on Scotland's key priority sectors (as set out in the GES), pushing the limits of what can be done to access alternative channels of finance more efficiently/directly and looking at the ways of developing information on the Scottish economy.
Council's recommendations on achieving the 2011 growth target
36. The Council made the following recommendations to the Scottish Government to support delivery of the 2011 growth target:
- Implement the proposed policies (see below) immediately;
- Undertake an economic appraisal to verify the potential value of further reductions in non-domestic business rates;
- Further develop the focus on the key sectors set out in the GES (Creative Industries, Energy, Financial and Business Services, Food and Drink, Life Sciences, Tourism, Education and Healthcare) by continuing the dialogue and preparing progress reports on each key sector. Each sector should be reviewed in turn over the course of the next 3 years with reports being presented to the Council at future meetings;
- Take steps to improve Scottish Economic Statistics on migrants.
Recommended Policy Proposals
Overarching Policy Proposal
- Create a narrative of economic success and a joined-up approach to promoting the country at both home and abroad
Policies to pursue population growth through in-migration and retention
- Encourage better use of migrants' skills
- Scottish flexibilities within the Points Based System for Managed Migration
- Develop a more focused Diaspora strategy
Policies to develop a supportive business environment (including planning)
- Take forward the CEA's recommendations on planning
- Incentivise local economic development
- Boost productivity through improved interventions promoting enterprise, innovation and investment
Policies to target key sectors, markets and projects
- Further promote the energy sector and its supply chain
- Boost the productivity of the key sectors of the Scottish economy, including the food industry, life sciences and the health sector
Policies to target increases in participation where the potential gains are greatest
CEA Annual Report and update on the Work Programme
37. The Council agreed the structure, content and plans for preparing its first Annual Report, due to be published by the end of the year.
38. Council members gave brief updates on two pieces of work they are undertaking for the Council ahead of a more substantive discussion at the next meeting:
- Raising productivity levels in Scotland; and
- Increasing Participation and Cohesion in Scotland.
Next meeting
39. The date of the next meeting is on 3 October 2008 and will take place at Dumfries House, Cumnock.
The following members of the Council were present:
First Minister
Sir George Mathewson (Chairman)
Mr Crawford Beveridge
Professor Andrew Hughes Hallett
Professor John Kay
Professor Alexander G Kemp
Mr Jim McColl
Professor Frances Ruane
Lord Smith
Frances Cairncross
Apologies:
Professor Finn Kydland
Sir James Mirrlees
Also present:
John Swinney, Cabinet Secretary for Finance and Sustainable Growth
Fiona Hyslop, Cabinet Secretary for Education and Lifelong Learning
Dr Andrew Goudie, DG Economy and Chief Economic Adviser, Scottish Government.
Fiona Robertson, Head of Economic Strategy Directorate.
Dr Jennifer Steedman, Economic Strategy Directorate, Scottish Government.
Claire M. Smith, Economic Strategy Directorate, Scottish Government.
Stephen Noon, Senior Policy Adviser, Scottish Government.
Maureen Rooney, Assistant Private Secretary to the First Minister, Scottish Government