The Council of Economic Advisers has been created to advise the First Minister on how to increase Scotland's sustainable economic growth rate. The eighth meeting of the Council will take place on 12 February 2010.
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Introductions, Minutes and Actions
1. The Chair welcomed all members of the Council to the seventh meeting.
2. The Chair referred members to the minutes and matters arising from the sixth meeting. Council members indicated that they were content.
Implementation of the Council's First Annual Report
3. The First Minister thanked Council members once again for the constructive work they had undertaken in writing their first Annual Report. The Scottish Government has responded positively to the Council's recommendations and considerations with 38 of the 44 being accepted in full and none rejected.
4. Work to take forward the advice of the Council is underway across government and the First Minister gave an interim report on progress, drawing the attention of the Council to several notable developments.
5. The First Minister described the success of Homecoming 2009 in boosting the tourism sector this year and in establishing a longer-lasting legacy of goodwill amongst those visiting Scotland and participating in over 300 branded events.
6. The Council's recommendations on the environment were being addressed through a wide range of measures designed to expand the production of renewable energy and develop in Scotland new technologies to tackle climate change. The First Minister cited examples including the opening this year of Europe's largest onshore wind farm at Whitelee and the recently established Scottish European Green Energy Centre in Aberdeen.
7. Work had begun too on the Council's recommendation to produce a report on each of the key sectors vital to economic growth in Scotland. The Council has already considered two reports on the Financial & Business Services and Food & Drink sectors, providing a range of recommendations on how to maximise their economic potential.
8. The First Minister confirmed that the Scottish Government will continue to take action to build on the Council's work by bringing forward actions to secure employment, support businesses and communities and ensure a strong economic recovery for Scotland. A detailed report on progress in implementing the Council's first Annual Report will be published in early 2010.
Update on the Scottish Economy
9. The Chair invited Dr Andrew Goudie, the Government's Chief Economic Adviser, to provide an update on the Scottish economy.
10. Dr Goudie reviewed recent movements and trends in key official statistics and business surveys and provided an assessment of global developments and future prospects for the Scottish economy. The full presentation can be found on the Scottish Government website at: http://www.scotland.gov.uk/Topics/Economy/state-economy/latest.
11. Dr Goudie's presentation indicated that:
- Many advanced economies remain in recession, although the rate of decline in output in most countries has eased in recent months and weak growth is expected to return towards the end of 2009.
- Emerging economies are expected to drive the global recovery, but the timing and magnitude of the upturn remains highly uncertain.
- Conditions in financial markets have improved and the risk of further systemic difficulties has receded.
- Scottish output contracted by 2.4% in Q1 2009, a rate consistent with that of the UK and other advanced economies.
- The downturn in the Scottish economy has been broad-based with all sectors of the economy affected to some degree.
- Business surveys suggest that the rate of decline in Scottish output eased in Q2 2009 and there are indications that moderate growth may emerge in the second half of 2009.
- Unemployment rates in Scotland have deteriorated markedly since the start of 2009, though they remain better than those for the UK as a whole.
- Employment has fallen sharply and is expected to continue to decline throughout 2009 and into 2010. This will be reflected in further significant increases in unemployment.
- Credit conditions in the domestic economy remain constrained, with an increase in demand for credit coinciding with a fall in the availability of credit.
12. Discussion followed on the marked deterioration in UK public finances and the huge challenge that this presents. The Council agreed to discuss public finances, in particular the Government's capital budget, at a future meeting with a view to bringing forward further advice.
Borrowing Powers
13. The Chair invited the Council lead to set the scene for a discussion on borrowing within the current devolution settlement and frame a set of issues for consideration.
14. The devolution settlement introduced little change to the fiscal regime that previously applied to the former Scottish Office. The Scotland Act also placed a legal prohibition on borrowing by Scottish Ministers except for a modest borrowing facility. In contrast, local authorities across the UK continue to enjoy the freedom to borrow, subject to HM Treasury expenditure controls.
15. Funding secured under the private finance initiative (PFI) for investment in capital projects, such as transport infrastructure, hospital and school buildings, falls outside normal borrowing controls and is termed 'off balance sheet'. Payments against PFI contracts, which typically stretch over decades, are met from current expenditure budgets and in effect represent a lasting claim on future tax receipts. The Council expressed concerns about the use of 'off balance sheet' financing on grounds of a lack of transparency and the potential that exists for over commitment of future, and as yet unknown, government revenues.
16. The Council debated the desirability of 'off balance sheet' financing compared with conventional, and more transparent, forms of borrowing. This included discussion of relative borrowing costs and the implications of new international financial reporting standards, which will change the accounting treatment of this type of financing.
17. The Council continued earlier discussions about the need for Scottish Ministers to have the ability to borrow, together with the concept of having an advisory fiscal policy commission to comment on sustainability issues and provide market reassurance.
18. The Council will expand on this discussion and bring forward recommendations in due course.
Achieving Scotland's Productivity Target
19. The Chair invited the CEA lead to present a third Council paper on the issues of productivity and innovation in Scotland.
20. The Council's interest in productivity and innovation reflects the recognition that higher productivity will help serve the Government's target for economic growth by reducing unit production costs, increasing competitiveness, raising earnings and enhancing the economy's capacity to expand.
21. The Council was reminded of the historical productivity performance of the Scottish economy, noting how labour productivity in Scotland has for many years trailed some way behind productivity in the US and other advanced economies.
22. While Scotland ranks very highly in measures of public sector R&D expenditure, a proxy for innovation, it performs much less well on equivalent expenditure among businesses. This may be explained by a lack of capacity in many small and medium-sized businesses to create or absorb new techniques, or it may indicate a branch office problem whereby high-value strategic and research activities are carried out at headquarters located outside Scotland.
23. Better coordination within the higher education sector (e.g. research pooling) and between the higher education sector, the enterprise agencies and business presents a great opportunity for Scotland. The Council discussed means to facilitate peer-to-peer communication between researchers and the type of web-based systems that can help to enhance knowledge exchange and 'match-make' between researchers and companies.
24. The Council reflected on the dominant role of services in the economy and considered the scope to improve process and systems innovations in driving productivity. A review of the services sector in general might throw some light on the scope to boost innovation in services and the potential scale of productivity gains available in this sector.
25. Key challenges that the Council faced in tackling this topic were to identify specific and concrete proposals to increase productivity and innovation, and to separate actions that enable productivity gains (but do not in themselves provide an incentive for firms to make the necessary changes), from those which would provide a positive incentive to do so.
26. It was agreed that the suggestion for a system of visibility and exchange for current research would be investigated and a report presented to the next meeting. This and the Council's further recommendations on productivity will be outlined in the second Annual Report.
Key Sector - Life Sciences
27. The Chair invited Professor Anne Glover, the Government's Chief Scientific Adviser, to give a presentation on life sciences to inform the Council's thinking on the key sector.
28. Professor Glover began by explaining what comprises the life sciences sector, describing Scotland's success within the sector and highlighting the opportunities that are available to develop it further. Scotland attracts substantial research funding (approx. 14 to 20 per cent of UK resources for research) and the life science community contributes around £3 billion annually to the Scottish economy. The sector spans more than 600 companies (mostly SMEs) and employs over 30,000 people in predominantly high-value jobs.
29. Professor Glover outlined both opportunities and challenges for the sector in Scotland and discussed ways that the public sector could help unlock the unrealised potential of Scotland's unique environment for life sciences. Examples of Scotland's advantages that were mentioned in the discussion included: Scotland's depth of high quality researchers; the ability of the NHS to track patients through the CHI patient identifier; positive public attitudes to research in Scotland; and, the strong infrastructure of the NHS in terms of offering facilities for clinical research trials.
30. In order for the Scottish life sciences sector to remain globally competitive, support for the sector needs to be more focussed to ensure we are investing in the right stages of development. Intellectual property from universities, research institutes and the NHS could be better pooled to create high quality 'data packages' to attract big pharmaceutical companies. There is also a need to engage with NHS Scotland to intensify interest in early stage clinical trials. Such trials generate value in their own right but also have the added benefit of improving the health of Scotland's population as patients involved in clinical trials receive high standards of healthcare (e.g. through closer monitoring). In addition, being on a trial tends to improve outcomes (often just the placebo effect) and funding from the sponsoring companies helps to defray treatment costs.
31. Professor Glover discussed the wealth creation chain for life sciences and highlighted how Scottish companies are often taken over by larger pharmaceutical companies at a very early stage when potential value has not been established and without a mechanism to ensure that the Scottish economy receives a return on investment. If there was more support for Scottish companies then they may be able to push through to later stages of the wealth creation chain and develop to become larger companies, which then provide a more durable return to the Scottish economy.
32. The Council discussed these issues and ways to overcome them and improve the value added of the life sciences sector. Areas discussed included the shift towards more open systems where knowledge and research are increasingly shared and collaboration that has taken place between the four Scottish universities with the strongest interest in life sciences.
33. The Council said that it would return to life sciences at a future meeting to offer more detailed recommendations to the Government on how to realise the full potential of the sector.
Scotland 's Generation Advantage
34. The Chair welcomed David Wilson, Director for Business, Enterprise and Energy, to the meeting and invited Mr Swinney, Cabinet Secretary for Finance and Sustainable Growth, to present the study on Scotland's Generation Advantage.
35. The study looked at the scope, benefits and attractiveness of the various generation technologies available to Scotland, seeking to identify which sources are likely to possess the greatest comparative advantage.
36. The study indicated that at present the cheapest method of providing energy is to burn fossil fuels and this is what free markets would deliver in the absence of government intervention to tackle harmful climate change impacts. When the costs of climate change impacts are incorporated, the price of fossil fuels is very much higher and low carbon alternatives need to be pursued if the Scottish Government is to meet its commitments under the Climate Change Act.
37. Scotland possesses a number of advantages for low carbon generation technologies which may not be offered elsewhere, driven primarily by its climate, marine environment and offshore geology. The key generation technologies in which Scotland is recognised as having an advantage include: wind, hydro, bio-energy and marine. In addition, Scotland has the potential to provide permanent long-term storage of carbon dioxide emissions and facilitate the development of a North Sea carbon dioxide infrastructure network.
38. The Council welcomed the study and acknowledged the groundwork it provides. Council members would reflect on the analysis further and consider it alongside other related energy issues, including access charges to the national grid, the economic opportunities for Scotland in renewable technologies, and the range of incentive schemes that exist to encourage investment in low carbon technologies.
Second Annual Report and Work Programme
39. The Council discussed the draft chapters of their second Annual Report and the format it should take when published in December.
40. The First Minister and the Cabinet Secretary outlined several subject areas on which the Government would welcome the Council's advice. The Council would consider these in preparing the forward work programme.
Next Meeting
41. The Chair noted that the next meeting of the Council will take place on Friday 12th February 2010.
The following members of the Council were present:
First Minister
Sir George Mathewson ( Chairman)
Ms Frances Cairncross
Professor Andrew Hughes Hallett
Professor John Kay
Professor Alex Kemp
Professor Finn Kydland
Sir James Mirrlees
Mr Jim McColl
Professor Frances Ruane
Lord Robert Smith
Apologies were received from:
Mr Crawford Beveridge
Also present:
John Swinney, Cabinet Secretary for Finance and Sustainable Growth
Dr Andrew Goudie
Professor Anne Glover (Life sciences discussion only)
David Wilson (energy discussion only)
Jennifer Erickson
Simon Forrest
Sean Neill
Lucy Proud
Dermot Rhatigan
Dr Jennifer Steedman