The Scottish Government

The Council of Economic Advisers has been created to advise the First Minister on how to increase Scotland's sustainable economic growth rate. The sixth meeting of the Council will take place on 15 May, 2009.

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MINUTES OF THE FIFTH MEETING - 16TH JANUARY 2009 - DUFF HOUSE, BANFF

Introductions, minutes & actions arising

1. The Chair welcomed all members of the Council to the fifth meeting.

2. The Chair referred members to the minutes and matters arising from the fourth meeting. Council members indicated that they were content.

Scottish Government Response to the Council of Economic Advisers First Annual Report

3. The First Minister began by thanking the Council for the tremendous amount of work it has undertaken over the course of its first four meetings, culminating in the publication of the Council's First Annual Report in December 2008. The Scottish Government is already acting on the analysis and recommendations set out in the Report to help ensure that Scotland emerges from the current economic downturn in a stronger and more competitive position.

4. The First Minister noted that the Scottish Government's Response to the Report (published on 15 January) was judicious and responsible, accepting 18 of the Council's 22 recommendations in full.

5. The First Minister drew attention to two areas which act as good examples of where the focus of the Council has added impetus to step change in Scotland:

• Planning - this was the first issue which the Council discussed and it made a series of recommendations to the Scottish Government in February 2008. Since then a significant amount of work has been undertaken with the planning community and this has already generated tangible results. For example, the number of appeal decisions issued in 12 weeks has increased from 4% in April 2008 to 39% in December 2008. Similarly, since May 2007 this administration has consented 17 renewable energy projects. The average for the previous administration was four projects consented per year. These improvements will be accelerated under the new Planning Framework; and
• Borrowing powers - the Council has recommended that the Scottish Government should explore the possibility of new means of borrowing to finance public sector infrastructure. This is particularly pertinent for addressing the current economic downturn. While the Scottish Government has done all that it can within existing powers to stimulate the economy and protect jobs, increased borrowing powers would enable more to be done.

6. The First Minister informed the Council that in many cases action is already underway to implement the Council's recommendations, and, in others, action plans are currently being drawn up. Progress will be reported at future Council meetings.

7. The First Minister then turned the Council's attention to the Scottish Economic Recovery Programme which was published as part of the Scottish Government's Response to the Annual Report. The First Minister outlined the key elements of the Economic Recovery Programme, a six point programme aimed at boosting Scotland's economy:

• Reshaping capital expenditure plans - to focus spending on investment that will have a more immediate impact on the economy and protect jobs. This includes accelerating the supply of affordable housing by bringing forward £120 million of planned spending from 2010-11 for the Affordable Housing Investment Programme, in conjunction with local government, to help support the house-building industry over the next two years. This forms part of plans to accelerate £227 million of capital spending into 2009-10, on top of £30 million in 2008-09;
• Ensuring all government activity, including planning and regulation, supports economic development - this includes working with developing Scottish companies to enhance their ability to maintain capital expenditure;
• Intensifying activity and support for Homecoming 2009, to boost tourism - this includes targeting 100,000 additional visitors generating extra spend of £40 million. Early indications are that these targets will be exceeded;
• Intensifying work around fuel poverty and energy efficiency;
• Increasing advice and support to businesses and individuals - this includes doubling the size of business advisory services and accelerating European Structural Funds programmes, which have been helped by the movement of sterling; and
• Improving financial advice and support to vulnerable individuals and families.

8. The First Minister concluded by noting that the Council's First Annual Report was insightful and authoritative. He hoped that the Council were satisfied with the Response.

9. Sir George Mathewson asked the Council for their comments on the Response.

10. The discussion focussed on two areas:

• Education - It was agreed that the Council should continue its work on Higher Education and also investigate issues in Scottish schools (in particular the transition from primary to secondary) and Scottish colleges; and
• Borrowing Options - It was agreed that a key part of the Council's forward work programme would be to explore borrowing options for Scotland and look at ways of creating an appropriate financial framework that will ensure the long-term affordability of investment.

11. The Council welcomed the First Minister's offer to report on the progress that is being made in implementing the Council's recommendations at future meetings and suggested that progress should also be reported and published in the Council's Second Annual Report. This was agreed.

Update on the Scottish economy

12. The Chair invited Dr Andrew Goudie to provide an update on the Scottish economy.

13. Dr Goudie reviewed recent trends, key indicators and evidence from business surveys and official statistics to assess:

• the recent performance of the Scottish economy;
• the Global Outlook;
• the UK Outlook; and,
• the Scottish Outlook.

14. Dr Goudie's assessment concluded that:

• there is a continuing slowdown in all areas of the Scottish economy with anticipated reductions in GDP in the second half of 2008;
• major world economies are already in recession and more are expected to follow, affecting Scottish export markets;
• there is considerable doubt over forecasts of a sharp V-shaped recession for the UK; and,
• the Scottish economy is likely to see negative growth throughout much of 2009 and it may well spill over into 2010.

Key Sector Report 1 - Financial and Business Services

15. The Chair set out the relevant background to this session. One of the key recommendations made by the Council in its First Annual Report was for the Scottish Government to clarify the potential problems in each of the key sectors identified in the Government Economic Strategy and identify how government policies can be more supportive. To help this process, the Council indicated that it would consider one key sector at each of its future meetings.

16. The Chair noted that the first key sector to be discussed would be Financial and Business Services. The Chair invited the CEA lead to present the background paper on the sector and the Council's initial views.

17. The CEA lead identified the two key questions which the Council was attempting to answer:

• How robust is the Scottish financial services sector? What are its competitive advantages ? How can these be enhanced?
• What are the areas in which Scottish Government policy might assist the development of the financial services industry?

The robustness and the competitive advantage of the sector

18. The Council identified three broad pillars within financial services: banking; fund management; and insurance.

19. With regard to banking, it was agreed that the Council will consider what practical steps might be available to the Scottish Government to ensure its desired outcomes i.e. ensuring that as much head office function as possible remains in Scotland and that in any integration process as many Scottish jobs as possible are preserved. In doing so, the Council will have in mind the possible role of the two smaller Scottish retail banks, Clydesdale and Lloyds TSB Scotland.

20. Turning to fund management, it was noted that if the Scottish banks had been relatively aggressive in the preceding years, Scottish fund managers had been relatively conservative. In particular, Scotland played only a modest role in the boom in alternative assets - hedge funds and private equity - since 2000. In 2009, however, with the winding down of both these new sectors, this relatively conservative stance may be seen to have served the Scottish industry well. Moreover, Scotland's competitive advantages - which rely in large part on a reputation for trust and solidity - are likely to be of particular value in the years ahead.

21. There are, however, some questions about Scotland's long run competitive advantages in this sector. The fact that Scotland did not appear to be an especially attractive location for private equity or hedge fund managers, even though it may be a relief in the current environment, raises questions about whether Scotland is at the forefront of innovation in this sector. Dublin has become a major centre for fund administration: this has not happened in Scotland, in part because Scotland is part of the UK for fiscal and regulatory purposes.

22. In terms of the third pillar of financial services - insurance - this divides sharply into two segments: general and life. Although Scotland has a strong actuarial profession, it has never had a major presence in general insurance. The main Scottish activity is in life insurance, which is in practice mainly long term savings products. Scotland's life insurance sector is therefore closely related to the retail banking and asset management sector. There are serious issues to be addressed around long-term competitive positioning given changes in markets for traditional products such as the with profits policy.

23. Most Scottish businesses have been acquired by financial conglomerates based outside Scotland, except for the largest, Standard Life. The second largest, Scottish Widows, having been acquired by Lloyds TSB, is now part of the enlarged Lloyds/HBOS group.

Areas in which Scottish Government policies might assist

24. It was noted that over the last thirty years, the UK Government has generally been a passive actor, responding to questions about industrial structure when they are posed - and deciding about them on relatively narrow competition grounds. Government has not, even informally, taken constructive action or encouraged shifts of strategic direction or management changes (the acquisition of HBOS by Lloyds is a striking exception to this policy stance).

25. The Council stressed that the UK is, in this policy, unusual. While none of the countries Scotland would naturally make comparisons with have, or would wish to have, any formal planning structures, in most comparable countries (and, indeed, most European countries), the shape of the business sector would be influenced by an informal nexus of government, investment institutions and senior business people.

26. While there are arguments for this laissez-faire stance, the practical consequences of this policy in the Council's view have been the denuding of Scotland of corporate headquarters.

27. There are many other strategic questions relating to the future of financial services (and other key sectors the Council will review).

28. The Council has reviewed how government policy and support can affect performance in the financial services sector in a number of areas:

• promotion - truly Scottish national identity to Scottish competitive advantage;
• education - research, training and skill provision;
• government assistance - selective fiscal assistance and FDI promotion;
• small firm support - advice and support for SMEs and start up businesses; and,
• regulation - both sector specific and general (e.g. planning).

29. Of the key sectors the Council has identified, the financial services sector probably requires the least attention in terms of promotion. Scotland is already widely identified with financial services - perhaps more, in fact, than the share of financial services in Scottish GDP would justify.

30. More needs to be done, however, to link education to the financial business services sector. Scotland does not seem to have university research activity in finance of scale or impact to match the significance of its financial services sector, nor either part time or full time courses with the impact of those available in London (although the Council understands some developments are planned). Implications for vocational skills and training and schools were also discussed.

31. The Council noted that policies are in place or being developed to provide assistance, and small firm support is already provided to this key sector. In terms of regulation, this is a reserved matter under the Scotland Act and this has both advantages and disadvantages.

32. There was some discussion about the best way of taking this work forward. It was agreed that lead Council members should be invited to attend the next meeting of the Financial Services Advisory Board (FiSAB). Consideration could then be given as to how the issues identified by the Council might be reflected in the Scottish Government's Financial Strategy.

The Innovation System in Scotland

33. The Chair invited the Council lead to present the key findings of the Council's review of the innovation system in Scotland.

Public sector versus private sector innovation

34. It was noted that spending on research and development (R&D) and innovation activity at the aggregate level in Scotland looks healthy. Compared to other countries Scotland ranks highly on indicators dominated by public investment - levels of tertiary education, public R&D expenditure and lifelong learning - but does much less well in the realm of private business. Reasons why innovation is much lower in the private sector than the public sector were discussed. Suggested causes for the observed discrepancy were: lack of capacity in smaller firms to create (or absorb) new techniques, products and ways of doing things; insufficient capacity because they are not where the decision making is or where technical designs are made i.e. the branch office problem; and lack of the right skills in the workforce.

Scotland's innovation performance

35. In Scotland there are low levels of networking both between firms and between firms and universities. The business base in Scotland lacks companies of scale and the presence of key decision-making functions of international companies. This means that joint ventures, collaboration and partnerships are often necessary to provide sufficient capacity to fully exploit the research and emerging technologies being supplied. Scottish Enterprise and the Intermediary Technology Institutes (ITIs) believe their operations are having some success in brokering successful commercial partnerships but there needs to be a greater focus on commercialisation and on building management and absorptive capacity within Scotland's corporate base. Therefore, a further issue that needs to be pursued is the lack of coordination between companies. There may be a case to merge some of the innovation promoting agencies, or at least a need to establish clear leadership.

36. As with productivity, Scotland's innovation performance has a significant sectoral and compositional dimension. The Scottish Government recognises that support for innovation has been somewhat out of kilter with the present services-dominated structure of the Scottish economy and its new proposed framework for innovation will aim to achieve a more appropriate balance.

37. Measures of innovation and programmes in place have traditionally been built around technical/product innovation. There is growing evidence that process innovation will be key in future. The Council would like to understand how process innovation can be supported within State Aid rules.

38. The Council identified three areas for further work:

• In Scotland, there appears to be high levels of support on the supply-side but this is mismatched with the demand side. There is a need to support companies to ensure a better balance between supply and demand for innovation;
• Looking at how we can solve the networking problem in Scotland. The key is networking and bringing together people from different schools of thinking, as demonstrated by the success in the health science sector in Dundee. The Science Foundation Ireland was also raised as a good model to follow - it was tasked with identifying key scientists to be based in universities for five years and worked very well in some cases with links to businesses established;
• Improving leadership in the Scottish innovation system. ITIs are moving back into Scottish Enterprise which should help.

39. The Council also presented evidence from a recent study by the Irish Government's Department of Enterprise, Trade and Employment, Innovation in Ireland (2008), that identified ten key areas where government can make a difference. It is too early to see the results of the initiatives undertaken in Ireland as they have only been in place for two years, but the Council recommended that this progress was monitored and tracked regularly.

40. A wide ranging discussion ensued during which the Council proposed a number of additional practical suggestions for encouraging innovation in Scotland, including targeted initiatives to:

• Bring world-renowned experts to build and lead centres of excellence in Scotland - i.e. repeating successes like those experienced in the health science sector in Dundee and in the oil and gas sector;
• Offer executive courses on how to handle innovation e.g. describing examples of successful innovation and property right protection;
• Provide more incentives/rewards for all types of innovation and exploitation of ICT;
• Offer new networking opportunities around innovation to foster greater cooperation, collaboration and pooling among businesses, and between businesses and universities;
• Increase the visibility of the significant amount of R&D going on at Scottish universities, for example by compiling a database of all research projects underway to help different departments link up to what is happening elsewhere.

41. It was agreed that the Council would continue its work on innovation as one strand of the wider work it was undertaking on productivity. The Scottish Government should consider how the key issues and suggestions arising from the Council's discussion might inform the development of the Government's proposed innovation framework and be reflected at an operational level through a series of targeted innovation initiatives.

Achieving Scotland's Population Target

42. The Chair invited John Swinney, Cabinet Secretary for Finance and Sustainable Growth to set out how the Scottish Government intends to achieve Scotland's population growth target.

43. John Swinney reminded the Council that Scotland's population growth target is to match average European [EU 15] population growth over the period from 2007 to 2017. He presented an overview of the nature of the population challenge and an assessment of the scale of intervention needed to achieve this population target.

44. John Swinney noted that while increased birth rate will be crucial for sustainable population growth over the long term, meeting the population target to 2017 will mean focusing on increased in-migration and increased retention of indigenous Scots. He stressed that even with a renewed focus in these areas, delivering on the population growth target will be very difficult. Indeed, it will require a sustained and joint effort by government, local authorities, businesses and others to turn around decades of gradual population decline and deliver a step change in Scotland's historic population growth performance.

45. Matching projected average annual [EU 15] population growth of 0.45% would, based on Scotland's population in 2007, require average annual population growth of around 23,000-24,000 in Scotland - well above the 12,500-13,000 currently projected. Moreover, the achievability of the target will also be determined by a number of critical contextual factors such as: economic conditions, flows from the 'A8' countries and changes in UK and EU migration policy.

46. John Swinney referred to previous meetings of the Council (on 8 February and 13 June 2008) at which the Council had discussed the importance of migration in the context of achieving Scotland's 2011 growth target. Following these discussions - and, subsequently, through its Annual Report - the Council recommended that the Scottish Government consider pursuing policies which allow for:

• a more focused Diaspora strategy;
• a better understanding of migrants' skills; and
• the enhancement of Scottish flexibilities within the points based system for UK managed migration.

47. The Council also called on the government to support population and economic growth through a narrative of economic success based on the strong fundamentals of the Scottish economy and the advances currently happening in key sectors.

48. John Swinney informed the Council that these and other policies were discussed by Cabinet in June 2008. This resulted in Cabinet approving a number of policy options to help government and public services deliver on the population growth challenge:

• Create a narrative of economic success and a joined-up approach to promoting the country at home and abroad. The aim is to promote Scotland's demonstrable strengths and economic opportunities more systematically to potential migrants, returning citizens, and potential leavers. Since June 2008, the Scottish Government has begun developing such a narrative, using research to segment different audiences and isolate different communications needs. During 2009, this narrative will support the Homecoming and Fresh Talent messages - as well as messaging for inward media visits to Scotland.
• Develop a more focused Diaspora strategy. The objective here is to ensure Scotland's Diaspora strategy is more explicitly linked to population growth. The Scottish Government is currently delivering a comprehensive programme of Homecoming marketing to Diaspora groups, calling on those groups to return to Scotland during 2009.
• Encourage better use of migrants' skills by introducing Relocation Advisory Service Plus (RAS). Since June 2008, a scoping exercise has been taken forward, with SDI and others, on the future functions of the RAS. It is expected that the new RAS service will commence in April 2009.
• Develop new measures to encourage more students from the rest of the UK and abroad to learn in Scotland - and to stay beyond graduation. Since June 2008, the Scottish Government has been working with the British Council Scotland and others to design a package of enhanced support for international students and careers services to improve information about employment opportunities.
• Introduce a Scottish green card and find further flexibilities for Scotland within the UK's points-based migration system. Since June 2008, the Scottish Government has undertaken preparatory work on the specific flexibilities that it will pursue with the UK Government in 2009.

49. The Chair invited the CEA discussant to lead the CEA discussion on the population growth target and in particular to give views on policies 1-5 above.

50. The CEA discussant noted that these seemed perfectly sensible policies to pursue but noted the importance of the analysis/thinking underpinning these policies.

51. The discussant's starting point was to query why the Scottish Government wants increased population growth in Scotland. Is it to enhance economic activity, to increase human capital or to fill skill shortages? These basic questions are important and ultimately determine the most suitable policies.

52. In terms of emigration from Scotland, the Scottish Government needs to understand why people are leaving, which parts of the country they are leaving from and where they are going. Similarly, in terms of immigration to Scotland, the reclamation issue needs to be considered - why are Scots not coming back? In terms of the attraction of non-Scots - why are Edinburgh and Glasgow not attracting people as Dublin has been in the recent past? Who is Scotland attracting? Why are those relocating to Scotland not staying over the long term?

53. The Council also stressed the importance of:

• considering immigration and emigration, and the motives of Scots and non-Scots, separately;
• obtaining feedback on Scotland's image (for example, has research been conducted to obtain feedback on the image of Scotland - from businesses or universities and so forth?);
• high quality education and the pull of education in attracting migrants. For example, understanding the competition (who are Scottish Universities competing with?) and peoples motives for choosing to study at Scottish colleges and universities (subjects or locations?) is key to the effective promotion of the product.

54. Finally, the Council stressed that the Government would benefit from implementing the green card policy quickly, and avoiding needless delays. The Irish Government lost immigrants as the implementation of the process was too bureaucratic and slow. The importance of green cards for spouses and dependents of those migrating also needs to be recognised.

55. John Swinney thanked the Council for their comments. He agreed with the Council on the importance of the analytical underpinnings and noted that a substantial amount of research and analysis had already been undertaken on the population growth target. He also agreed that there needs to be an honest reflection about what people think about Scotland and recognition that websites and blogs mean that bad news travels very quickly to a wide audience. The Cabinet Secretary added that it is essential for Scotland to counteract these messages by promoting the good things about Scotland - for example, culture and music.

Forward Work Programme

56. The Council had a short discussion about the forward work programme.

57. It was agreed that in terms of key sectors:

• Food and Drink - would be discussed at the sixth meeting (15 May);
• Life Sciences - would be discussed at the seventh meeting (September 18).

58. It was also agreed that the Council of Economic Advisers (CEA) would have an initial discussion on borrowing options for Scotland at the next meeting.

59. The Council spent some time discussing the specification for the energy study. It was agreed that a sub-group of the Council would steer the study.

Next Meeting

60. The Chair noted that the Council next meeting will take place on Friday 15th May, 2009.

The following members of the Council were present:

First Minister
Sir George Mathewson (Chairman)
Mr Crawford Beveridge
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 Smith

Also present:

John Swinney, Cabinet Secretary for Finance and Sustainable Growth
Dr Andrew Goudie, DG Economy and Chief Economic Adviser, Scottish Government
Fiona Robertson, Head of Economic Strategy Directorate, Scottish Government
Dr Jennifer Steedman, Economic Strategy Directorate, Scottish Government
Lucy Proud, Economic Strategy Directorate, Scottish Government
Stephen Noon, Senior Policy Adviser, Scottish Government
Simon Forrest, Assistant Private Secretary to the First Minister, Scottish Government
Jennifer Erickson, Consultant