Fraser of Allander Institute Economic Commentary
Vol 42 No 4 Foreword
The past 12 months have provided both good news and Like many before them, this year’s finalists demonstrated bad for Scotland’s economy – economic growth has exceptional leadership skills. Their vision and picked up during 2018, but overall growth remains low. commitment, combined with ongoing investment in their One reason for the low growth is a lack of productivity people, technology and other assets, has ensured they growth. continue to run strong, sustainable businesses which can adapt to ever-changing marketplaces. This mix of fortunes is also evident in the latest of Deloitte’s Power Up reports, Power Up: UK-Wide Growth. As we face the challenges ahead including the continuing It showed that Scotland’s economy has only grown at uncertainty around Brexit, it is important that business around half the UK average rate and while the country has leaders in Scotland continue to plan for the future. outperformed the UK average in productivity growth over Similarly, it is important not to lose sight of the importance the last 10 years, productivity growth remains low. of announcements such as the upcoming Scottish Budget, detailing the Scottish Government’s spending and tax The latest Power-Up report looked at many years of plans for the year ahead. employment and productivity data to help identify where Scotland can maximise opportunities by learning from the The Scottish Government’s use of income tax powers has past, before combining this with the very real experiences certainly been the main focus of recent Scottish Budgets, and views of current business leaders, educators, local and with the announcement in October’s UK Budget that government officials and other stakeholders. the Chancellor intends to raise the higher rate threshold to £50,000, from April next year, it is likely to dominate One of the findings is that Scotland’s businesses need to once again. collaborate further with educators and policymakers to develop the vital skills required to harness productivity Scotland’s Finance Secretary, Derek Mackay, has for regional growth. Another key finding is that Scotland’s indicated he does not intend to match this for Scottish business leaders will need to remain open and agile to income tax bands, which apply to earnings and pensions transformational opportunities, as digital strategies and for Scottish residents, and that will result in a noticeable technology innovation continue to influence productivity difference in the tax paid between Scotland’s higher rate gains in the short term. tax payers and those in the rest of the UK.
Our report also highlighted that Scotland needs more What impact this will have on investment and growth in businesses of scale that are competitively positioned Scotland is the subject of much debate. However, it is across international markets. important that Scotland is seen as an attractive place for people and businesses. We have an ageing population, Scotland can grow these businesses. Innovation and a shrinking working age population and it is vital for our entrepreneurialism are embedded in Scotland’s roots, future that we do not deter people from choosing to come standing businesses in good stead to respond to the to Scotland. challenges ahead. This was reflected in the recent Summit Entrepreneurship Awards which Deloitte was proud to There are no easy answers to how to improve Scotland’s sponsor once again. productivity growth, our economic growth or how to balance the nation’s books. As the country’s business landscape continues to evolve, it will be important for all leaders to think innovatively and plan differently, to identify solutions from which everyone can benefit.
John Macintosh Tax Partner Deloitte December 2018
Deloitte supports the production of the Fraser Economic Commentary. It has no control over its editorial content, including in particular the Institute’s economic forecasts.
1 Fraser of Allander Institute Fraser of Allander Institute Contents
Economic Commentary
3 4 5
Summary At a glance Outlook and appraisal
6 8 11
Global economy UK economy Scottish economy
15 18 20 Scottish Fiscal Scottish labour Latest Scottish Commission’s market indicators forecasts
21 23 25
Our forecasts ‘No deal’ Policy context
29 53 75 Economic Economic Economic Perspectives Perspectives Perspectives
Ewan Sutherland Scott McGrane et al David Waite et al
For regular analysis on the Scottish economy and public finances please see our blog www.fraserofallander.org
Copyright © University of Strathclyde, 2018. ISSN 2046-5378 Economic Commentary, December 2018 2 Summary The vote on the UK’s EU Withdrawal Agreement will Given the Brexit debate, the Scottish Government’s be one of the most significant in a generation. It upcoming Budget has received little attention. has the potential to shape the future of the UK and Scottish economies for decades to come. But the government faces a number of decisions that will shape the direction of Scotland’s public Whatever happens, it will not mark the end of the finances for years to come. uncertainty. A vote in favour will see the UK enter a near two-year transition process. But the most Will Mr Mackay choose to follow – at least in part challenging issue – a future UK-EU trade deal – has – the decision by the Chancellor to raise the Higher yet to be agreed. Rate threshold on income tax? Or will he take a further decisive shift to differentiate Scottish and Some will argue that a vote against will increase rUK income tax policy? the likelihood of ‘no-deal’. Others argue that it provides a last opportunity to secure a softer As a minority administration, what might be offered Brexit. to secure parliamentary support? Will Scottish Green Party backing lead to a more fundamental In such times, any economic forecasts must come look at the funding of local government? with major health warnings. And what is the long-term strategy for public What we can say with some confidence however, services? With the NHS on track to soon account is that ‘no deal’ would be a substantial (negative) for around £1 of every £2 spent by the Scottish economic shock. The Bank of England have set out Government, pressures on other budgets continue a ‘worst-case’ scenario which could see the UK to increase. We have heard a lot about plans for economy shrink by around 8% from 2019. priority areas of spend, but what about other areas? To put that in context, that is around double the During the coming months of debate and size of the recession Scotland witnessed during negotiations, the Scottish budget will no doubt play the financial crisis. Whilst some people have second fiddle to Brexit. But we should not forget questioned this analysis, even under a less the importance of the budget, not only because it disruptive ‘no deal’, the Bank’s analysis suggests determines how much income and council tax we that the slowdown could still be significant. all pay, but because of what it will tell us about the long term outlook for public spending and tax All this comes at a time when the Scottish economy competitiveness in Scotland. had been showning signs of picking-up. Growth in Scotland for the first six months of 2018 had outperformed the UK as a whole. Fraser of Allander Institute December 2018 In the event of a ‘smooth’ Brexit with a full transition period, we expect growth to pick up. We have kept our forecasts broadly unchanged on September at 1.4% for 2019, followed by 1.5% for 2020 and 1.4% for 2021.
3 Fraser of Allander Institute Scottish growth forecast Unemployment forecast
We expect growth to pick up but Job 2019 3.9% remain below down from Market trend - even 4.2% assuming a broad based agreement with the EU. 2020 3.9% down from 4.3%
1.5% 1.4% 1.4% 1.4% 2021 4.1%
2020 2019 2021
Fraser of Allander Institute At a glance
Chart: Scottish growth (since 2013) – year and quarter Table: Employment & unemployment rates, July - Sep 2018 3.0% Employment (16-64) Unemployment (16+) Scottish quarterly GDP growth 2.5% Year Year Scottish annual GDP growth - Q on Q Rate (%) Rate (%) Change Change 2.0% Scotland 75.0% ▼ 3.8% ▼ 1.5% England 75.8% ▲ 4.1% ▼ 1.0% Wales 75.0% ▲ 3.9% ▼
Percentage change (%) change Percentage 0.5% N. Ireland 68.5% ▲ 4.1% -
0.0% UK 75.5% ▲ 4.1% ▼
-0.5% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2013 2014 2015 2016 2017 2018
Chart: FAI forecast Scottish economic growth range
4% Forecast Table: FAI forecast Scottish economic growth (%), 2019 – 2021 3% 2019 2020 2021 2% GDP 1.4% 1.5% 1.4% 1% Production 1.6% 1.7% 1.6%
0% Construction 1.1% 1.1% 1.1% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Annual GVA GrowthAnnual GVA Services 1.4% 1.4% 1.4% -1%
-2%
-3% Economic Commentary, December 2018 4 Fraser of Allander Institute Outlook and Appraisal Whilst economic growth in Scotland remains below trend, it has picked-up in 2018 to its fastest pace since 2014. However, businesses are increasingly nervous about the prospects for the UK and Scottish economies in the light of the looming Brexit impasse and the potential political crisis it could usher in.
Chart 1: Scottish growth since 2013, year and quarter Introduction 3.0% Scottish quarterly GDP growth As we outlined in our last Commentary, growth in the 2.5% Scottish annual GDP growth - Q on Q Scottish economy has picked up in recent times –
2.0% consistent with the forecast we set out this time last year. Chart 1. 1.5% Whilst activity remains below trend, it has certainly 1.0% been more positive than in recent times and has Percentage change (%) change Percentage 0.5% helped unemployment to remain at a near historical low. Table 1. 0.0%
-0.5% But the outlook is dominated by one issue: Brexit. Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2013 2014 2015 2016 2017 2018 There remains a sense that no one knows where the Source: Scottish Government ongoing political process will end: indeed, the range of outcomes seems as wide as ever. Forecasting any economic outlook in such times is fraught with difficulties. We make no excuses for Table 1: UK labour market, Jul - Sep 2018 saying that we can offer little certainty to where the economy might go in the months ahead. Employment Unemployment Inactivity (16-64) (16+) (16-64) Whatever the outcome, it is far from apparent that Scotland 75.0% 3.8% 22.0% the fog enveloping the near term outlook will roll England 75.8% 4.1% 20.8% away to reveal a clarity that has been starkly absent Wales 75.0% 3.9% 21.9% thus far. N. Ireland 68.5% 4.1% 28.5% Indeed, many critical elements may simply be UK 75.5% 4.1% 21.2% fudged, or more openly deferred, leaving uncertainty Source: ONS, LFS for many more months, if not years. In such times, building resilience into plans for 2019 and beyond is perhaps the most effective strategy that can be undertaken at the current time by businesses. One of the most frustrating things about the Brexit Table 2: Change in Scottish GDP relative to baseline of full EU debate – whether you agree or disagree with the membership after 15 years decision – is that many important issues, such as EEA FTA WTO this month’s Scottish Budget, are being side-lined. UK (2018)* -2.5% -6.7% -9.3% But the decisions that Mr Mackay will take on tax, SG (2018) -2.7% -6.1% -8.5% public spending and economic policy, will shape the FAI (2017) - -4.9% -7.5% economic and fiscal outlook for years to come. * Figures for the UK economy Source: Fraser of Allander Institute It is therefore important that we continue to debate and critique the choices that will be made.
5 Fraser of Allander Institute Table 3: OECD & EU quarterly growth rates: 2017 to 2018 The global economy 2017 2018 The global economy has been in robust health for Q1 Q2 Q3 Q4 Q1 Q2 Q3 over two years now. UK 0.4 0.3 0.4 0.4 0.1 0.4 0.6 US 0.4 0.7 0.7 0.6 0.5 1.0 0.9 World GDP is estimated to have risen by 3.7 per cent in 2017, up from 3.2 per cent in 2016. The IMF Japan 0.7 0.5 0.6 0.2 -0.2 0.7 -0.3 forecast that it will remain at this – above trend – Canada 1.0 1.1 0.4 0.4 0.4 0.7 0.5 level in 2018. Euro Area 0.7 0.7 0.7 0.7 0.4 0.4 0.2 Germany 1.1 0.5 0.6 0.5 0.4 0.5 -0.2 However, as we highlighted in our last commentary, France 0.8 0.6 0.6 0.7 0.2 0.2 0.4 most economists believe that growth has peaked (at least in advanced economies). Italy 0.5 0.4 0.4 0.3 0.3 0.2 0.0 Source: OECD Indeed, there is growing evidence of a slowdown in many of Scotland’s key trading partners. Table 3. In particular, output in the Euro Area rose by just 0.2% – a four year low – over the summer.
Chart 2: Global manufacturing PMI’s: falling back in recent Significantly, the German economy contracted for months the first time since 2015, driven in part by ongoing 10 challenges in car manufacturing, but also wider World Advanced economies Emerging market economies fragility in investment and household spending. 8 Indicators of activity across the global economy have 6 eased back. Chart 2. Some of this reflects a natural 4 change in the economic cycle. However, there are concerns that heightened political uncertainty could 2
Index, 2015 = Index, 100 turn a ‘soft-landing’ into something altogether more 0 challenging. Chart 3.
-2 Chief amongst these are the potential impacts of rising trade tensions, led by the increasing -4 2012 2013 2014 2015 2016 2017 2018 protectionist policies of the Trump administration. Source: Thomson Reuters Datastream World trade accelerated sharply in 2017 – to grow at its fastest rate since 2011 – but there are signs that this momentum is fading with recent trade disputes taking their toll.
Chart 3: Global Economic Policy Uncertainty Index, 1997 - Oct Chart 4: Long-term impact of Brexit on Ireland’s GDP 2018 EEA CU FTA WTO 350 0%
-1% 300
-2% 250
-3% 200 -4% 150 -5%
100 % change from baseline 2030 in baseline from % change -6% Economic PolicyUncertainty Index Tariffs and customs 50 -7% Regulatory divergence
Service barriers 0 -8%
Source: The Department of Business, Enterprise & Source: Economic Policy Uncertainty Innovation (DBEI), Irish Government
Economic Commentary, December 2018 6 Chart 5: Stock market performance to Nov 2018, 2007 = 100 Of course, Europe faces its own challenges from 250 Brexit – nowhere more so than Ireland. Chart 4. STOXX Europe 600
STOXX Asia/Pacific 600 The heightened risk around that global outlook has 200 S&P 500 spilled over into renewed volatility in stock markets.
FTSE 100 Most major indices have seen falls in recent weeks. 150 The FTSE 100 is down around 10% on its May 2018
100 peak. Chart 5. Such volatility has some investors speculating that the world’s major central banks Indices: Jan 2007 = 100 = 2007 Jan Indices: may put off plans to tighten monetary policy. 50 Closer to home, Sterling continues to trade at a 0 discount, driven by concerns over the UK’s long-run 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 prospects post-Brexit. Chart 6. Source: Thomson Reuters Datastream The FT reported in November that investors have withdrawn more than $1tn from UK-focused equity funds since the referendum – the highest outflows since the financial crisis. Chart 6: Exchange rates, $/€ to £, 2013 - Nov 2018 And in October, the UK market was rated the least 1.80 popular of 22 asset classes among fund managers in US $ to GBP 1.70 a Bank of America Merrill Lynch survey. Euro to GBP 1.60 The price of oil has entered ‘bear market’ territory.
1.50 In just over a month, Brent has plunged by around 30% to below $60. Chart 7. Whilst fears of a global 1.40 slowdown have not helped, it is an oversupply that 1.30 US US $/Euro to GBP has had the greatest impact. 1.20 This of course matters here in Scotland. The oil and 1.10 gas sector had just come through a difficult period,
1.00 with confidence returning. Chart 8. 2013 2014 2015 2016 2017 2018
Source: Thomson Reuters Datastream Whilst the low oil price will come as a blow to many, the mood in the sector remains confident with most contractors and operators better prepared for a lower break-even price.
Chart 7: Price of oil, 2013 - Nov 2018, US $/BBL Chart 8: Optimism in North Sea , 2004 - May-Oct 2018
120 100
80 100 60
40
80 20
0
60 -20 % net balances US$ US$ / BBL -40
40 -60 Business optimism in UKCS compared to a year ago -80 Business optimism in UKCS over next year 20 -100
0 2013 2014 2015 2016 2017 2018 Source: Thomson Reuters Datastream Source: FAI / AGCC
7 Fraser of Allander Institute Chart 9: UK economic growth compared to (best & worst) G7 The UK economy economies
4.0% Following a period of relatively strong growth in EU Referendum 2014 through 2016, the UK economy has slowed 3.5% significantly over the last couple of years. Chart 9. 3.0% In late October, the OBR revised down their forecasts 2.5% for GDP growth in 2018 to just 1.3%. Since then, 2.0%
GDP growth GDP figures have shown that growth picked-up over the 1.5% summer (+0.6%), boosted in part by good weather,
1.0% the World Cup and recovery in sectors which had Lowest G7 GDP growth experienced a challenging start to 2018. 0.5% Highest G7 GDP growth
Latest UK Data 0.0% This recovery was particularly pronounced in Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 construction, where output grew by over 2%. 2015 2016 2017 2018 Source: ONS & OECD It is over a longer time horizon that a clearer picture of the true health of an economy can be assessed. Chart 10: UK economic performance, 2008 - Q3 2018 This shows that even with these recent positive figures, UK growth remains below trend with annual 1.5 6 Real GDP growth: quarteron previous year's quarter growth of 1.5%. Chart 10.
1.0 4 It is therefore hard not to conclude that the ongoing 0.5 2 Brexit uncertainty has had an impact. The fall in the 0.0 0 pound has squeezed household incomes. Business investment has arguably taken the biggest hit and -0.5 -2 has contracted now for three consecutive quarters. -1.0 -4 Of course, predicting where the economy ‘would -1.5 -6
RealGDP growth: quarter onquarter Quarter on quarter (left hand side) have been’ had a referendum not been called is -2.0 -8 fraught with difficulty. Chart 11. Quarter on previous year's quarter (right hand side) -2.5 -10 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 What we can at least conclude is that those who Source: ONS predicted a sharp recession immediately after June 2016 were wrong, but so too were those who suggested that leaving the EU would have no negative impact. Chart 12.
Chart 11: Post-referendum performance relative to pre- and post-referendum growth forecasts Chart 12: Weaker productivity forecasts for UK for next 5 years 2.5% 110 November 2016 forecasts
108 October 2018 forecasts 2.0% 106 EU Referendum 104 1.5%
102
100 1.0% Actual
GDP (indexed, 2015/16=100) (indexed, GDP 98 BOE May 2016 96 0.5% Productivity forecasts (% change year) last on change (% forecasts Productivity BOE Aug 2016 94 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 n/a n/a 0.0% 2015 2016 2017 2018 2019 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2022/23 Source: Bank of England & ONS Source: Office for Budget Responsibility
Economic Commentary, December 2018 8 Chart 13: Productivity performance pre and post financial crisis Interestingly, much of the explanation why both in G7 the Bank of England and the Office for Budget Responsibility remain relatively pessimistic about United States the outlook for the UK economy is not driven by Japan short-term factors, such as Brexit uncertainty
United Kingdom or even a more fragile and volatile global policy environment. Germany Instead, it is driven by continued weak productivity. France It is this, more than anything else that is holding Canada back growth forecasts.
Italy It is easy to see why the government’s official 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% Growth of labour productivity per hour worked forecasters continue to take a much more Average growth, 1997-2007 Average growth, 2008-2018 pessimistic outlook for productivity given recent Source: ONS & OECD performance. Productivity across developed economies is much lower than pre-crisis but the drop off in the UK is particularly pronounced. Chart 13. Chart 14: OBR forecasts for the UK unemployment rate: currently At the same time however, the labour market overly pessimistic continues to perform much better than expected, 10 with unemployment consistently beating forecasts – 9 Chart 14. Indeed, there are increasing signs of skills 8 shortages and rising vacancies across sectors. 7
6 Taken together, the outlook for productivity and
5 the labour market, means that there seems to be
4 little spare capacity to help growth pick-up beyond current levels – Chart 15. Most forecasts predict Unemployment (%) rate Unemployment 3 Latest that the UK is operating at close to its potential or 2 Mar 2017 - Mar 2018 Nov 2011 - Mar 2014 sustainable level (the ‘output gap’). 1 Dec 2014 - Nov 2016 Jun 2010 - Mar 2011 0 It also means that whilst real earnings have started to rise once again, the prospects for a substantial Source: Office for Budget Responsibility pick-up in take-home pay appear remote. For many households, the feeling of ‘austerity’ is likely to continue for some time to come. Chart 16.
Chart 15: Output gap estimates, Q1 2008 - Q2 2018 Chart 16: UK real and nominal pay growth since 2007
6 6 Range excl. highest and lowest estimates Range of all estimates Nominal Regular Pay OBR estimate High (all estimates) 5 4 Real Regular Pay High (excluding highest) 4
2 3
2
% 0 1
-2 0
-1 -4
Quarter on same quarter a year ago growth (%) growth ago year a quarter same on Quarter -2
-6 -3 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Jul-07 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Jul-18
Source: Office for Budget Responsibility Source: ONS
9 Fraser of Allander Institute Chart 17: UK Services, Construction and Manufacturing PMI Faced with an ongoing squeeze, it is no surprise 60 that borrowing amongst households is on the rise once again. At the same time, the UK savings ratio 58 continues to remain close to record lows. 56 Most up to date business surveys point to growth 54 continuing, but at a slow pace. 52 The UK manufacturing PMI fell to just 51.1 in 50 October (well below market expectations and well 48 above 50 marks expansion). UK services PMI also
Balance of respondents (> 50 = expansion) = 50 (> respondents of Balance 46 fell to 52.2. Chart 17. Services Manufacturing Construction 44 The CBI’s Business Optimism indicator decreased 2016 2017 2018 to -16 for Q4 2018, the lowest reading since Source: RBS, IHS Markit immediately after the EU referendum. At the heart of the slowdown in business activity is a fall-off in investment. Chart 18: Surveys of capacity pressures November’s Bank of England Inflation Report found 4 that, for Q3 2018, Brexit uncertainty was the single 3 largest factor weighting on investment plans. Chart 2 18. Other measures, such as Deloitte’s CFO survey, 1 have also found evidence of rising uncertainty. Chart 0 19. -1
-2 Of course how this affects different parts of the UK Survey indicators -3 will vary. Agents -4 BCC New work by researchers at the University of -5 CBI Strathclyde – as part of the Economics Statistics -6 Centre of Excellence (ESCOE) – shows that the economic gap between the south and north of Source: Bank of England England has widened since the referendum. Chart 20. After adjusting for inflation, London’s economy is roughly 5% bigger than it was in June 2016 compared to growth of only 1.3% in the North East.
Chart 19: CFO Business Uncertainty since 2013 Chart 20: Nowcasts of UK regional growth, year to Q3 2018
70% 2.0% 1.8%
60% 1.6%
1.4%
50% 1.2%
1.0%
40% 0.8%
Real GVA growth (%) growth GVA Real 0.6%
30% 0.4%
0.2% 20% 0.0%
10% % of businesses rating uncertainty veryhigh or high
0% 2013 2014 2015 2016 2017 2018
Source: Deloitte Source: ESCoE
Economic Commentary, December 2018 10 Chart 21: GDP per capita in Scotland and the UK, Q1 1999 = 100 The Scottish economy 135 Scotland After a sustained period of weak growth, the Scottish 130 UK economy has been showing signs of strengthening. 125
120 Growth has picked up and employment remains at relatively high levels. This has been a positive 115 turnaround on twelve months ago. 110 Outturn Forecast 105 Growth over the year to June 2018 was the fastest since late 2014/ early 2015, with the Scottish
Index Index (Q1 1999 = 100) 100 economy outpacing the UK for the last two quarters. 95
90 That being said, annual growth of 1.7% (quarter-to quarter) and 1.4% (4Q-on-4Q), still lags Scotland’s Source: Scottish Government, SFC and OBR long-term historical growth rates. At the same time, much of the pick-up in recent times arguably reflects a degree of ‘catch-up’ after a challenging period for the Scottish economy. Chart 22: Sector contributions to annual GDP growth, %, Q2 2018 on Q2 2017 As Chart 21 highlights, since late 2014 the Scottish
1.8% 0.30% 0.06% 1.66% economy has been lagging behind the rest of the UK. 1.6% 0.21% 1.4% 0.36% The last six months have at least helped to stop this 1.2% 1.0% trend. 0.12% 0.8% 0.23% 0.6% 0.40% Overall, the upturn has been relatively broad-based. 0.4% 0.2% -0.02% 0.00% Contribution to GDP growth (%) growth GDP to Contribution 0.0% Over Q2, there was growth of 0.3% in production -0.2% activities, 1.9% in construction and 0.5% in services. Construction Manufacturing and finance and catering and fishing Other production Business services Distribution, hotels Transport, storage Agriculture, forestry and communication With services making up over 75% of activity – it is Government and other Electricity & gas supply no surprise that Scotland’s overall rate of growth has
Annual GDP growth (Q2 on Q2) been shaped by services. Chart 22. Production Services Source: Scottish Government & FAI analysis The pick-up in Scottish exports continues, with international exports increasing by almost 10% over the last year. With imports growing only 3% in value, this has Chart 23: Contribution of expenditure components to nominal contributed significantly to nominal GDP growth over GDP, Q1 2017 - Q2 2018 the last year. Chart 23. 4.5% 4.0% This currently means that, in the latest quarter, 3.5% Scotland has a positive trade balance with the rest 3.0% of the world, off-setting a large deficit with the rest 2.5% 2.0% of the UK. 1.5% 1.0% In our report, Scotland 2050, we discuss Scotland’s 0.5% wider long-term export challenge and our gap in 0.0%
Contributions to Nominal GDP growth performance with the best performing countries. -0.5% -1.0% Q1 Q2 Q3 Q4 Q1 Q2 We highlight the importance in taking advantage of 2017 2018 the significant global opportunities that are open to Households Government Investment (GCF) Net Exports Nominal GDP the Scottish firms.
Source: Scottish Government & FAI analysis
11 Fraser of Allander Institute Chart 24: Scottish and UK economic performance since the The Scottish economy ten years after the financial crisis financial crisis 120
115 It is 10 years since Scotland – like many other parts of the world – slipped into recession as the global 110 financial system ground to a halt.
105 A decade later, how have we fared? 100 The financial crisis wiped around 4% of output from 95 the Scottish economy. UK output fell by over 6%. 90 Chart 24. Interestingly however, the scale of the Scottish GDP Scottish GDP per head UK GDP UK GDP per head downturn is now believed to have been much less
Level of GDP & GDP per head (2006 Q1 = = 100) Q1 (2006 head per & GDP GDP of Level 85 – around 50% smaller – than first measured at the 80 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 time at the height of the crisis. Chart 25. Source: Scottish Government Instead, what has been particularly challenging for Scotland has been the weak recovery. It took around five years for output to return to its pre-crisis level in Scotland. Chart 25: Scottish recession during the financial crisis - the impact of data revisions (date estimates were published) Chart 24 also shows that whilst the UK economy 108 suffered a deeper recession than Scotland (driven by 106 a sharper fall in services), it performed better in the
104 recovery period.
102 Today, GDP per head in Scotland is 1.7 per cent
100 greater than it was 10 years ago. To put that in
Sep_18 context, average annual growth in the preceding 10 98 Jul_17 years was 1.9% per annum. Indexed, 100 2006 = Q1 Indexed, Apr_16 96 Apr_14 Apr_12 The impact of the crisis varied by sector. 94
92 Unsurprisingly, construction bore the brunt of the Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 downturn – contracting by over 20%. According 2006 2007 2008 2009 2010 2011 to the newly revised data from the Scottish Source: Scottish Government Government, the sector in Scotland around the same level as it was 10 years ago. Chart 26.
Chart 27: Volume of residential property sales in Scotland per year, Q2 2003 - Q2 2018 Chart 26: Scotland’s construction sector since financial crisis 45,000 110 40,000 105 35,000 100 30,000 95 25,000 90 20,000 85 15,000 80 Scottish Construction Series
Volume of residential property sales property residential of Volume 10,000 75 5,000 70
Level of Scottish Construction series (2006 Q1 = = Q1 100) (2006 series Construction of Scottish Level 0 65
60 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Scottish Government Source: National Records of Scotland
Economic Commentary, December 2018 12 Scottish Economy Dashboard
Growth % of Key issues/trends Economy 2017 Q2 2018
Production 17% 2.0% 0.3%
Manufacturing 11% 1.6% 0.8% ■■ Confidence and growth has returned recently. In particular, growth in computer products, food and drink, and textiles ■■ Exporters continue to benefit from weak pound. But fall in oil price, and slow down in export markets is a challenge. At risk from dislocation of UK-EU trade
Food and drink 3% -0.8% 3.8% ■■ Sector continues to grow strongly – and is now at its highest ever level ■■ Growth potential is high, although boosting productivity in sector will be key for sustainability ■■ Future post-Brexit challenges could include ‘just-in-time’ deliveries and access to migrant workers
Services 76% 1.0% 0.5% Retail and 10% 1.6% 1.2% ■■ The most recent data suggests a modest upturn in retail wholesale and wholesale combined after a challenging start to 2018 ■■ But retail data suggests tough trading conditions, with many high-profile names on the high street struggling ■■ Rising wages could give some respite to a sector going through significant structural change
Accommodation 3% 0.2% -0.4% ■■ Modest growth over the year, but some fall-back in the & food services most recent quarter ■■ Like retail, many eating establishments are facing challenges. Changes in how households consume entertainment is impacting many business models ■■ Tourist facing elements of sector continue to do well
Financial & 6% -0.9% 2.5% ■■ Sector has seen strong growth recently after a tough 2017 insurance ■■ Unlike other sectors directly exposed to the financial crisis – such as professional services and real estate – financial services has taken much longer to get back on its feet and remains below pre-crisis highs
■■ Uplift in public sector capital investment should help support infrastructure, but wider measures of activity Construction 6% 4.4% 1.9% – including commercial property and house-building – remain relatively subdued
■■ Grew strongly in 2017 but performance in the last four quarters has been relatively poor ■■ Sector is arguably most exposed to any hit to migration Agriculture 1% 4.6% -1.4% post-Brexit ■■ Sector will need clarity on support, opportunities and regulation post-Brexit to ensure growth can continue
13 Fraser of Allander Institute Chart 28: Services and financial services since the 2008 The housing market has also yet to fully recover to financial crisis, 2000 = 100 pre-financial crisis levels of activity. Chart 27. 160 Overall, services fared better. Output only fell by 1.6 150 per cent. Unsurprisingly, financial services output 140 fell sharply (by around 12%). It is still over 7%
130 smaller than its pre-crisis level. Chart 28.
120 Interestingly however, it has adjusted to a
110 more ‘normal’ size which perhaps reflects how
Level of GDP (2000 = 100) = (2000 GDP of Level Total Services unsustainable the ‘good’ times were but also the 100 Financial & Insurance activities underlying resilience of the (non-banking) sector 90 since. 80 A key concern from past recessions was that unemployment could rise significantly. However, Source: Scottish Government whilst unemployment did rise (peaking at 8.9% in 2010), it has since fallen back. But earnings have lagged behind for much of the Chart 29: Performance of average real wages across the G7 decade. Indeed, earnings growth in the UK has been since the financial crisis, 2007 = 100 the weakest in the G7 since the financial crisis. Chart 29. 115 According to the Scottish Fiscal Commission, real 110 household incomes per head are on track to remain
105 below their pre-financial crisis levels even by 2023. Poverty levels in Scotland have, as a result, 100 remained stubbornly high. Chart 30. around
Index 100 2007 = Index 95 1 million people are estimated to be living in households classified as in ‘relative poverty’ – 90 including 1 in 4 children. Canada France Germany Italy Japan UK US 85 The key reason for weak earnings growth has 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 undoubtedly been the poor performance of Source: ONS & OECD productivity. Had the pre-2006 trend continued, productivity in Scotland would be around 15% higher than it is today. Chart 31. Chart 30: Relative poverty in Scotland (before and after housing costs) Chart 31: Scotland’s long-term productivity performance
25 1,250 130
20 1,000 120
15 750 110
10 500 100
5 250 90
% of households with in relative poverty poverty relative in with households of % Scottish Productivity (Output per hour)
Number of people in households in relative poverty in relative in households of people Number Pre-financial crisis trend productivity Level of productivity (2006 Q1 = = 100) Q1 (2006 productivity of Level 0 0 80 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 Relative poverty (before housing costs) (LHS) Relative poverty (after housing costs) (LHS) 70 Number of people in relative poverty (before housing costs) (RHS) Number of people in relative poverty (after housing costs) (RHS) Source: Scottish Government Source: Scottish Government & FAI analysis
Economic Commentary, December 2018 14 Chart 32: Scottish employment & unemployment rate Scottish labour market 10 77 Scotland’s labour market continues to experience 9 76 a period of historically low unemployment and high 8 75 employment. 7 74
6 73 Scotland’s headline unemployment rate is now
5 72 3.8%, its lowest recorded rate, with an employment
4 71 rate of 75%. Chart 32. Employment rate (%) Unemployment (%) rate Unemployment 3 70 Overall, Scotland’s unemployment rate is one of the 2 69 lowest in the UK. Chart 33. However, unlike in the Unemployment rate 16+ (LHS) 1 68 rest of the UK, inactivity has risen in Scotland over Employment rate 16-64 (RHS) 0 67 the last year – up 0.4% points compared to a fall of 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 0.4% points in the UK. Source: ONS, LFS This might not all be bad news however, as the largest increase has been amongst those aged 16–24, with some of this likely to reflect increased student numbers. Chart 33: Unemployment rate by different part of the UK In contrast to the past couple of years, the 6 balance of employment in Scotland between self-
5 employment and employee jobs appears to be shifting back towards employees. 4
% 3 This suggests that the substantial rises in self- employment witnessed since the Great Recession 2 may have eased somewhat. Chart 34. 1 At the same time, the number of people in part-time 0 work who are seeking – but cannot find – full-time work continues to fall. Chart 35. The ageing of Scotland’s labour force continues apace. Source: ONS, LFS
Chart 35: Percentage of part-time workers who cannot find full- Chart 34: Scottish employment & self-employment time work, Jan-Dec 2004 up to Jul 2017 - Jun 2018
2,700 600 20 Total Employment (LHS)
Employees (LHS) 18 2,600 Self Employed (RHS) 500 16
2,500 14 400
2,400 12 time workers workers time - 300 10 employed (thousands)
2,300 -
Employees (thousands) 8 Self 200 2,200 6 Percentage part of Percentage 4 2,100 100 2
0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: ONS, LFS Source: ONS, LFS
15 Fraser of Allander Institute Chart 36: Employment levels by age in Scotland since 2008-09 Employment amongst those aged 65+ continues 200 to rise. In contrast, there are fewer young people 16-24
25 - 34 employed now than 10 years ago. 180 35 - 49 Some of this reflects fewer young people in the 50 - 64 160 65+ general population, but it also reflects a lower youth employment rate. Chart 36. 140 Dec Dec 2008 = 100 - Whilst the headline measures of labour market 120 performance might appear robust, challenges Jan 2008 Jan remain. In particular, real earnings growth (i.e. after 100 adjusting for inflation) in Scotland has been – at best – barely positive over the last few years. Chart 80 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 38.
Source: ONS, LFS Much has been written about productivity since the financial crisis. Many hypothesis have been formulated, yet little appears to be changing in the headline data. Chart 39. In Scotland, while there has been some Chart 37: Youth (16-24) employment and unemployment in Scotland since 2008-09 improvement in ‘catching up’ with the UK over the 64 23 last decade, this reflects more the failure of UK 21 62 productivity than any particularly turnaround in 19 Scotland. 60 17 The last few quarters have produced better rates of 58 15 productivity growth, but overall, productivity has
56 13 barely moved since 2010/11. Employment rate 11 rate Unemployment 54 A recent report from Deloitte UK on productivity 9 in UK’s Nations and Regions concludes that 52 7 Scotland needs more businesses of scale that 16-24 employment rate LHS 16-24 Unemployment rate RHS are competitively positioned across international 50 5 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 markets as well as support in the development Source: ONS, APS of leadership skills and confidence to enter and succeed in export.
Chart 38: Median real earnings in Scotland and UK CPI inflation Chart 39: Scottish GVA per hour
5 105 4%
104 4 3%
3 103 2% 2 102 1% 101 1
100 0% 0
99 -1 -1% 98 % change earlier year on % change -2 -2% Growth rate (%) Output perhour 97 -3 Growth rate of productivity (RHS)
Labour productivity (Q1 2016 = 100) Output hour per Output = 100) 2016 (Q1 productivity Labour -3% Inflation 96 -4 Labour productivity (LHS) Real Earnings 95 -4% -5 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2016 2017 2018
Source: ONS, ASHE Source: ONS, Scottish Government
Economic Commentary, December 2018 16 Chart 40: Scottish hours worked, GDP and labour productivity The pre-financial crisis trend of sustained 3% productivity growth is no longer a given – temporary Weekly hours (inverted) GDP Labour productivity periods of growth have been eroded by stronger 2% growth in the number of hours worked. Chart 40.
1% New research by Edinburgh University academics Robert Zymek and Mark Mitchell offers new insights 0% on Scotland’s recent productivity performance. Chart % Change
-1% 41.
-2% Using novel methods, they show that the productivity gap with the OECD’s top performers can -3% be attributed to a low capital stock per worker, and Q1 Q2 Q3 Q4 Q1 Q2 2017 2018 low “Total Factor Productivity”. Chart 42.
Source: ONS, APS The former refers to the level of investment in machinery, equipment and infrastructure. The latter Chart 41: Productivity across countries, Denmark = 100, to the efficiency with which an economy combines purchasing power adjusted GDP per hour, 2014 its productive resources to grow its economy. 150 Whilst Scotland benefits from relatively high 125 workforce skills and relatively terms of trade, this
100 is insufficient to offset this weaker performance elsewhere. 75 This suggests that solutions for Scotland should 50 Productivity (Denmark 100) = (Denmark Productivity focus upon boosting investment – both public and private – and focussing upon the quality of 25 management within firms, the need to tackle the
0 prevalence of small and less efficient firms and demographic factors (such as population age) which may be possible culprits for Scotland’s low TFP. Source: Mitchell and Zymek (2018)
Chart 42: Scotland’s relative productivity performance, by key driver, Denmark = 100, 2014
Workforce Skill Capital Stock 150 150
100 100
50 50
0 0
Terms of Trade Total Factor Productivity 150 150
100 100
50 50
0 0
Source: Mitchell and Zymek (2018)
17 Fraser of Allander Institute Chart 43: FAI/RBS Business Activity Index, 2008 - Expected Q4 Latest Scottish indicators 2018
40 Business Sentiment indicators for Scotland continue to show a generally positive picture. 30
Expected 20 Our FAI/RBS Business Activity Index shows the expectations for Q4 to be fairly buoyant, following 10 a strong Q3 – Chart 43. The main areas of concern 0 remain around investment, as decisions are delayed due to wider economic uncertainty. Table 4. -10
Net balance (%) responses of balance Net -20 The RBS regional PMI shows that the sentiment in Scotland is in positive territory, on a par with the UK -30 as a whole. Chart 44. -40 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 The retail sector in Scotland has had a difficult Source: FAI - RBS Business Monitor period over the last year or so, with quarterly growth lagging the UK. Chart 45. Indeed, the volume of retail activity over the last year in Scotland has grown by 1.3%, compared to Table 4: FAI/RBS Business Monitor key indicators, Q3 2018 3.4% in the UK. Q3 Quarterly 12 month 3 year 2018 change change average It is large retailers (those with 250+ employees) in Business volume (net balance) Scotland that seem to be suffering the most. Volume New business +16% +7 +4 +17 of business in retail has remained flat over the Repeat business +10% +10 +9 +2 last year for these larger retailers, and has in fact Business concerns (%) contracted in the latest quarter. Weakening demand - important 77% -5 -1 -4 This compares with healthy growth for smaller Exchange rates - important 53% +1 -3 +3 retailers that is more similar to the overall UK Investment (net balance) picture. Capital investment -11% -5 -3 -8 Leasing -24% 0 0 -20
Source: FAI-RBS Business Monitor
Chart 45: Quarterly retail sales growth in Scotland and GB since Chart 44: RBS UK regional PMI, Jan 2016 - Oct 2018 2016 2.5% 65 Scotland GB 2.0%
60 1.5%
1.0%
55 0.5% Growth (%) Growth 0.0% 50 -0.5%
45 -1.0% Scotland OtherLondon UK regions and S.devolved East nations S. West Purchasing Managers Index (>50 = expansion) East Wales W. Midlands E. Midlands UK -1.5% Yorkshire N. East N. West N. Ireland Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 40 2016 2017 2018 2016 2017 2018
Source: RBS Source: Scottish Government
Economic Commentary, December 2018 18 Chart 46: Scottish Government Consumer Sentiment Index In contrast to business sentiment, the confidence current conditions, Q2 2013 - Q3 2018 of consumers is much more subdued. The outlook 40 for the Scottish Economy, household spending and Scottish Economy finances are all in negative territory. Chart 46. 30 Household Finances Looking in detail at consumer expectations for the 20 Scottish economy, the trend since 2015 has been Household Spending
10 that fewer people think the economy is getting better, and more people think the economy is 0 getting worse overall. Chart 47.
-10
Net balance of responses (>0 = = positive) (>0 responses of balance Net This would chime with the official data on the Scottish economy, insofar as the gap between -20 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Scottish and UK GDP per head has widened and then 2013 2014 2015 2016 2017 2018 persisted over recent years. Source: Scottish Government The UK Consumer Confidence Barometer is conducted by GfK on behalf of the EU, with similar surveys being conducted in each European country.
Chart 47: Scottish Government Consumer Sentiment Index The current survey was carried out in early November expectations of the Scottish economy, Q2 2013 - Q3 2018 2018. This collects views on personal finances, 50 Getting better Getting worse general economic conditions, views on major 40 purchases and how good a time it is to save. 30
20 The most recent figure for Scotland is both low in
10 historical terms and compared to the UK. Indeed, Better 0 this is the lowest value in over 4 years. Chart 48. 10 The outlook for the labour market remains positive. Worse
% of household responses20
30 Most indicators - such as the RBS Jobs Barometer - 40 all point to the labour market in Scotland operating 50 at near capacity. Chart 49. Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2013 2014 2015 2016 2017 2018
Source: Scottish Government
Chart 48: GfK Scottish Consumer Confidence Index, Jan 1997 - Chart 49: RBS Scottish Jobs Barometer index: continued high Nov 2018 demand for jobs
20 70
68 10 66
0 64
62 -10 60 -20 Netbalance 58 Scotland 56 -30 Scotland UK 54 UK -40 52 12 month moving average -50 50 2013 2014 2015 2016 2017 2018 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: GfK Source: RBS and IHS Markit
19 Fraser of Allander Institute Table 5: Latest GDP growth forecasts and outturn Scottish Fiscal Commission’s forecasts 2017/18 2018/19 2019/20 2020/21 Alongside the Scottish Government’s Draft Budget, SFC (Dec 2017) 0.7% 0.8% 0.9% 0.6% the Scottish Fiscal Commission (SFC) will publish SFC (May 2018) 0.7% 0.8% 0.8% 0.9% their revised forecasts for the Scottish economy. SG (Sep 2018) 1.3% - - - We discuss the wider budget context in the Policy 2017 2018 2019 2020 section of the Commentary. FAI (Sept 2017) 1.2% 1.4% 1.7% - FAI (Sept 2018) - 1.3% 1.4% 1.4% The SFC forecast a number of variables around their Source: Scottish Fiscal Commission, Scottish Government & FAI analysis now twice yearly reports. This is all underpinned by an ‘overall’ view of how they think the Scottish economy is faring and the outlook. The SFC have been cautious, forecasting growth of Chart 50: Employment rate (16+) in Scotland and the UK less than 1% until 2022. Table 5. 61% So what is worth watching out for?
60% The first thing that the SFC will have to do is reflect upon how their forecasts compare with the most 59% recent data on Scottish GDP (in particular, the major revisions to the Scottish construction series). 58% It is highly likely that the SFC will revise up their 16+ employment rate employment 16+ 57% growth forecasts. However, we see little evidence Scotland that they will take a much more positive outlook 56% than in their first two sets of forecasts. UK
55% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 The second key element that they will have to Source: ONS APS consider is how ‘tax rich’ this growth is likely to be. For income tax, the most significant devolved revenue by far, the two most important elements are employment and earnings. Chart 51: Annual growth in earnings (outturn) and SFC & OBR Mirroring the trend in economic performance, forecasts Scotland’s employment rate fell in 2016. Since then, 7% Outturn - Scotland employment in Scotland is now growing at the same Outturn - UK 6% SFC Dec 2017 rate as in the UK. Chart 50. SFC May 2018 5% OBR Nov 2017 What about earnings? 4% OBR Oct 2018
3% Chart 51 compares outturn data on average annual
2% earnings in Scotland and the UK, alongside two recent forecasts of earnings growth from the SFC and 1% OBR. 0% Annual growth in average earnings
-1% The latest data has confirmed somewhat slower
-2% growth in Scotland, consistent with the SFC’s assessment in May. However, the good news is that the gap between Scotland and the UK may not be Source: ASHE, SFC & OBR as large as perhaps thought. However, it seems likely that the SFC will continue to forecast weaker earnings growth in Scotland relative to the UK as a whole.
Economic Commentary, December 2018 20 Table 6: Latest growth forecasts for the UK economy 2018 2019 2020 Our forecasts Bank of England 1.5% 1.8% 1.7% OBR 1.3% 1.6% 1.4% Economic forecasting in the current climate is NIESR 1.4% 1.9% 1.6% fraught with difficulty. European Commission 1.3% 1.2% - Even in ‘normal’ times, forecasting is not an exact IMF 1.4% 1.5% 1.5% science. An economy – particularly a small open one Oxford Economics 1.3% 1.7% 2.0% like Scotland – is constantly subject to events out ITEM Club 1.3% 1.5% 1.7% with its control. This is why we are clear about the CBI 1.4% 1.3% - sensitivities of our forecasts and encourage readers Source: HM Treasury, Bank of England, OBR to focus on the range of estimates. The unpredictability of short-term outcomes, also highlights why it is important – particularly from a Table 7: Bank of England projections - what could they mean for Scotland? (compared to the financial crisis) policy perspective – to focus upon the long-term drivers of growth and prosperity. GDP Unemployment House prices But the debate in Scotland on such questions 2008-09 Financial -4% +131,000 -16% remains weak. We have through the year pointed to Crisis the weaknesses in strategy and economic thinking Disorderly -8% +100,000 -30% within policymaking. We see little evidence of things Disruptive -3% +52,000 -14% having changed for the better. Economic -0.75% to +/- 2,000 N/A partnership + 1.75% In terms of immediate prospects, Brexit remains the key risk factor. Source: Bank of England, Fraser of Allander Institute Firstly, no-one can predict with confidence what might happen next – particularly if Parliament votes Table 8: FAI Nowcasts for Scotland’s GDP in Q3 and Q4 2018 against the proposed withdrawal agreement. Q3 Q4 Secondly, there is simply no precedent for a Quarterly Growth 0.35% 0.39% ‘no deal’ outcome to use as a benchmark for Annualised Growth 1.42% 1.57% forecasting. In Box 1 we discuss the channels Source: Fraser of Allander Institute through which the economy could be impacted. So without any hard evidence about what might happen next politically, we have based our analysis Chart 52: FAI forecast Scottish economic growth range upon a smooth transition deal. This is the approach 4% taken by most other forecasters. Table 6. Forecast 3% The Bank of England has provided some thoughts. In November, they set out a series of scenarios 2% covering how the UK economy may evolve in the
1% event of a no deal. Table 7.
0% In this ‘worst case’ scenario – one of a disorderly 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Annual GVA GrowthAnnual GVA Brexit – the Bank believe that the UK economy could -1% shrink by 8%.
-2% To put this in context, the Scottish economy contracted by just under 4% during the financial -3% Source: Fraser of Allander Institute crisis.
* Actual data to Q2 2018. Central forecast with forecast Table 8 shows our latest nowcasts. uncertainty for 2018 – 2020. Uncertainty bands sourced from accuracy of past forecasts at different forecast horizons.
21 Fraser of Allander Institute Table 9: FAI forecast Scottish GDP growth (%) 2018 to 2021 The results are consistent with our expectations for 2018 2019 2020 2021 growth in 2018 first made in 2017. On balance, we believe that – setting aside any risks from the Brexit GDP 1.3% 1.4% 1.5% 1.4% negotiations going awry – Scotland should be on Production 1.5% 1.6% 1.7% 1.6% track to grow at a broadly similar rate to last year (if Construction 1.0% 1.1% 1.1% 1.1% not slightly faster). Table 9. Services 1.2% 1.4% 1.4% 1.4% Source: Fraser of Allander Institute Turning to our forecasts for the next three years, as in the past, we report a central forecast but also uncertainty bands that set out a likely range within which we predict Scottish economic growth will lie. It is important to note that such bands are based upon historical variations in our ‘normal’ forecasting performance. The potential for a ‘no deal’ Brexit Table 10: FAI Labour Market forecasts to 2021 outcome is clearly not a ‘normal’ event and would 2018 2019 2020 2021 significantly lower our outlook for growth. We do Employee jobs 2,495,250 2,521,800 2,550,400 2,577,700 think that the worst case scenario put forward by the Bank is highly unlikely, though accept growth will slow sharply. % employee job 1.0% 1.1% 1.1% 1.1% growth over year A technical recession – i.e. two or more consecutive ILO 98,000 103,500 104,400 112,500 quarters of falling output – whilst by no means a unemployment certainty, cannot be ruled out. Rate (%)1 3.7% 3.9% 3.9% 4.1% Source: Fraser of Allander Institute With nominal earnings growth expected to pick-up, Absolute numbers are rounded to the nearest 50. and provided that this outpaces inflation, household 1 Rate calculated as total ILO unemployment divided by total of spending should see some modest gains. economically active population aged 16 and over. Investment activity is likely to remain under pressure as Brexit-uncertainty continues to cast a shadow over growth ambition. But it could also be the element that bounces back most strongly in the event of a positive outcome (from the perspective of maintaining close ties to the EU). Chart 53: FAI GDP forecasts by sector, 2018 – 2021 Net exports and tourism are on track to continue to 1.6 benefit from the low value of Sterling. However, the
1.4 softening in global growth might mean that 2019 is not as healthy as 2018. As in recent years, services 1.2 should make the greatest contribution to growth. 1.0 There is a renewed risk in manufacturing however,
0.8 with the downturn in the price of oil likely to test
0.6 the resilience of the oil and gas supply chain. Most % contribution growth to GDP indications are that the sector is better prepared 0.4 than four years ago. Chart 53.
0.2 With major new public investment in the pipeline, 0.0 2018 2019 2020 2021 the construction sector should continue to see a Households Government Investment Trade (RUK) Trade (ROW) GDP growth, % more sustained outlook. Source: Fraser of Allander Institute We expect unemployment to rise slightly toward a level consistent with more medium-term trends. Table 10.
Economic Commentary, December 2018 22 Box 1. ‘No deal’ Clearly the greatest risk to our forecast is the possibility of ‘no deal’. Our own estimates suggest that – over the long-run – such an outcome would act as a significant drag on Scotland’s long-term growth potential. These estimates were obtained from what is known as a general equilibrium model of the Scottish economy. This however tells us little about the short-term impact of ‘no deal’. The challenge with forecasting what a ‘no deal’ might mean is the lack of any precedent to fall back on. So whilst we can be confident that a breakdown of the UK’s economic relationship with the EU will have significant economic implications, it is difficult to attach an exact number. The OBR and most independent forecasters have stuck to assuming that the UK and the EU will secure some form of deal, with a transition period. We follow that approach. The Bank of England in contrast, has set out a series of scenarios for what ‘might’ happen, with the aim of stress-testing the banking system. Up to March 2019, if a ‘no deal’ increases in probability, there are likely to be two forces at work. Firstly, there is a series of factors that may slow the economy even further. Sterling is likely to fall, pushing up inflation and reducing real wages. Financial markets are likely to be volatile. Some have suggested that the UK’s Credit Rating may be downgraded. All of this could lead to a further fall in business and consumer confidence, reducing investment and spending. Secondly, however, there are some forces that could boost growth. In particular, businesses and government may start to prepare – e.g. stockpiling and contingency planning – and this will help boost spending in the short-term. One thing that can be guaranteed is that economic activity is likely to be choppy. Post-March 2019, the outlook in the case of a ‘no deal’ outcome is likely to be more negative. Firstly, any boost from stockpiling and contingency will gradually be eroded: items stockpiled prior to ‘no deal’ cannot be used more than once. Secondly, uncertainty over how long a ‘no deal’ outcome could last might further dampen investment and spending. Thirdly, and of course most significantly, the actual barriers that a ‘no deal’ outcome would create – in terms of tariffs, customs controls and regulations – would come into immediate effect. The disruption to export markets and supply chains – for some – could be significant. Whilst it is important to remember that most UK businesses are one-step removed from international markets, the knock-on effects from weaker growth through supply chains is likely to be the key avenue through which growth slows. Analysis by the Fraser of Allander Institute showed that around 130,000 jobs are supported by EU export demand in Scotland. Much will depend upon how the government and Bank of England respond. It is also possible that the UK and EU authorities (at least in the short run) would try to mitigate some of the most disruptive consequences of a disorderly Brexit.
23 Fraser of Allander Institute Box 1. ‘No deal’ - continued Over the next year, there are a number of planned (regular) statistical releases which will cover activity in the Scottish economy. These will be likely watched carefully by commentators for evidence of an impact of the short-term impacts of Brexit. In the table below, we note these, and the period of time to which these relate.
Date Data Period covered Geography 1 December 2018 GDP 2018 Q3 Scotland 2 January 2019 Retail Sales Index 2018 Q4 Scotland 3 February 2019 GDP first estimate 2018 Q4 UK 4 March 2019 GDP 2018 Q4 Scotland 5 May 2019 Retail Sales Index 2019 Q1 Scotland 6 May 2019 GDP first estimate 2019 Q1 UK 7 June 2019 GDP 2019 Q1 Scotland 8 August 2019 Retail Sales Index 2019 Q2 Scotland 9 August 2019 GDP first estimate 2019 Q2 UK 10 September 2019 GDP 2019 Q2 Scotland 11 November 2019 GDP first estimate 2019 Q3 UK 12 November 2019 Retail Sales Index 2019 Q3 Scotland 13 December 2019 GDP 2019 Q3 Scotland
It is worth noting that official data on the period that Brexit actually occurs will not be available until August/September; and that data released in March will be referring to the period we are currently in now. With the departure of the UK from the EU set at the 29th of March 2019, this equates to the end of the first quarter. This means that the first release of economic statistics covering the period when the UK is no longer in the EU wil be in August 2019 – with the first estimate of UK GDP for the 2nd quarter of the year, and the Retail Sales Index for Scotland. The data for Scotland in 2019 Q2 will be available the following month. Only at that point will we have ‘hard’ statistical measures of the impact on short term economic variables. This distance between the time period and the data relating to that period means that all eyes will focus upon regular business surveys – such as our FAI Scottish Business Monitor – as well as “flash” estimates of economic activity, such as our monthly nowcasts.
Economic Commentary, December 2018 24 Policy context Budget 2019/20
The Scottish budget 2019/20, which Derek MacKay Chart 54: Scotland’s resource block grant, 2016/17 - 2019/20 will present to Holyrood on 12th December, will be £28,000 the third budget of this parliamentary session. The ‘story’ of the previous two budgets has been the £27,500 use by the Scottish Government of its new income tax powers to raise additional revenues from those £27,000 with higher than average incomes. Income tax policy has also been the conduit through which the £26,500 minority SNP government has leveraged political support for its budget from the Scottish Greens – £26,000
Resource block grant (£m, 2018/19 prices) 2018/19 (£m, grant block Resource Autumn Statement 2016 with the Greens securing additional revenue raising Autumn Statement 2017 measures in each of the past two budgets compared Budget 2018 £25,500 to those the government had initially proposed. 2016/17 2017/18 2018/19 2019/20 Source: HM Treasury Back at the start of the current parliamentary session, 2019/20 looked like it would be a In the 2018/19 budget this gap between revenues particularly tough budget year. At the time, the and BGAs was £428m in the Scottish Government’s resource block grant was due to decline by 1.4% in favour, largely because of the decisions taken on real terms, having fallen by 1.6% the previous year. income tax. How different might this number be in 2019/20? Since then, additional spending by the UK Government as a result of both better than forecast On the one hand, the income tax gap might be less revenues and some relaxation of fiscal policy, means significantly in Scotland’s favour this year, given that that the outlook for the block grant has improved. the SFC now appears to be taking a slightly dimmer The block grant will now in fact increase very slightly view about the prospects for Scottish wage growth in 2019/20, and be marginally higher than it was at than it had done last December (as indicated by its the end of the last parliament (2016/17). Chart 54. mid-year forecasts published in May). But the block grant is now only one part of the On the other hand, this somewhat less optimistic picture when it comes to the Scottish budget. The outlook could be offset by Phillip Hammond’s 2018 government’s exact spending envelope in 2019/20 Budget announcement of a significant increase in will also hinge on the tax forecasts of the Scottish the Higher Rate Threshold in rUK. This tax cut for Fiscal Commission (SFC) which will be published on higher rate taxpayers will reduce the size of the budget day (most importantly for income tax, but income tax BGA, the counterfactual estimate that also for LBTT, Landfill Tax and Non-Domestic Rates). is deducted from the Scottish Government’s block grant. Assuming the Scottish Government chooses Critically, what matters is the difference between the not to increase the Scottish higher rate threshold revenue forecasts and the forecasts of the so-called to the same extent, it may be able to retain the gap ‘block grant adjustments’ – the counterfactual between Scottish income tax revenues and the BGA estimates of the revenues that the UK Government at a similar level as last year. has foregone as a result of transferring each revenue stream to Scotland. Where Scottish revenues are Depending on which of these scenarios plays out, forecast to be higher than the corresponding BGAs the Scottish budget could end up being about the (perhaps because of a higher tax rate in Scotland, same in 19/20 compared to last year, or increase or faster growth in determinants of the Scottish tax slightly - perhaps by around 1% in real terms. base, such as wages), then the Scottish budget is better off to the extent of this difference.
25 Fraser of Allander Institute Tax policy and the budget deal As in the previous two years, parliamentary arithmetic means that the government will need to As well as the SFC’s assessment about the future do a deal with another party to ensure it can pass growth of the Scottish economy and the factors the budget bill. If, as in the previous two years, determining Scottish revenues (such as wages, the Scottish Greens are budget kingmakers, large employment, house prices, and so on), the Scottish increases in the higher rate threshold seem unlikely budget will be influenced by tax policy choices. in practice. One hypothesis is that the draft budget On income tax, Derek Mackay has indicated that the will propose a moderate real terms increase in the current five-band tax structure will remain in place, threshold, in anticipation of it being negotiated back but has not ruled out changes to rates or thresholds towards the existing level as part of the budget deal. within this structure. Theoretically this still leaves a Alternatively, perhaps 2019/20 will be the year wide range of policy options (Table 11), depending that the higher rate threshold ceases to be the on how the government seeks to balance its desire cornerstone of the budget deal. Earlier this year the to raise additional revenues with a preference for leader of the Scottish Greens Patrick Harvie wrote avoiding too many negative headlines about the size to Nicola Sturgeon to point out that progress on of tax liability differential between Scotland and rUK. local tax reform would be the party’s next area of These choices are likely to be most acute in relation ‘constructive challenge’ when it came to negotiating to the higher rate threshold. Compared to a policy of a budget deal in 2019/20. increasing the threshold by inflation: In this context, ‘progress on local tax reform’ could ■■ Matching the UK threshold of £50,000 would be seen to encompass a range of possibilities, cost around £280 million; including moves toward reform of council tax and ■■ Increasing the threshold by the same non-domestic rates, and allowing local authorities percentage as the rUK increase in 2019/20 to have greater fiscal autonomy in a range of existing would take the threshold to £46,850 and and new areas, potentially including through the cost around £130 million; enabling of new taxes at local level – such as visitor ■■ Freezing the threshold in cash terms at taxes or environmental levies. £43,430 would raise an additional £60 Spending choices million for spending on public services, but mean that some Scottish income taxpayers So whilst there remains some uncertainty would face an average tax rate of 1.5% higher around the size of the budget and the Scottish than rUK counterparts. Government’s tax policies, there is perhaps a little more certainty on the broad direction of the Table 11: Summary of income tax policy options spending choices that the government is likely to Static Dynamic effect take. effect (including behavioural We know for example that the Scottish Government response) will ‘pass on’ recently announced health 1p on Basic Rate (BR) £174m £167m consequentials from UK Government spending 1p on Intermediate Rate (IR) £133m £128m increases in England into the Scottish health 1p on Higher Rate (HR) £83m £64m budget. We know that the police budget will be protected in real terms. And we know the broad size 1p on Additional Rate (AR) £22m £2m of funding allocations for some of the government’s Freeze IR threshold rather than £7m £6m key spending commitments on educational increasing in line with inflation attainment, early learning and childcare, and higher Freeze HR threshold rather than £70m £64m increase in line with inflation education. Increase HR threshold to -£145m -£132m These commitments on their own account for almost £46,850 60% of the government’s resource budget. Real Increase HR threshold to -£306m -£280m terms increases in health spending, which are likely £50,000 to be around 2.4% in 2019/20, constrain other Source: FAI income tax model parts of the budget given the dominance of health
Economic Commentary, December 2018 26 spending as a share of the budget. Even if the total only slightly, whilst spending on some non-statutory budget increases by one or even two per cent, most areas including cultural and recreational services, other portfolios that account for the remaining 40% and planning and economic development, has fallen of spending are likely to see declining real terms by over 20%. Chart 56. settlements. Chart 56: Index of real terms changes in local government Even during the course of the first two budgets outturn expenditure by service area, 2010/11 – 2017/18 of this parliament, substantial variation in the 120 financial fortunes of different public bodies can be 100 observed. The core local government settlement has fallen by almost 3% between 2016/17 (the 80 last budget set by the previous parliament) and Roads and Transport 2018/19. The budget allocation to higher education 60 has fallen by almost 4%, despite it being one Education of the government’s spending ‘commitments’. 40 Social Work Environmental organisations such as SEPA, SNH and Environmental Services Zero Waste Scotland have seen budget reductions 20 Planning and Development Services between 2016/17 and 2018/19 of 6.7%, 8%, and (2010/11=100) Index expenditure Government Local Culture and Related Services 0 3.6% respectively. 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Over time, the Scottish budget is undergoing a Source: Provisional Outturn and Budget Estimate Statistics, radical change in its make-up. The prioritisation of the health budget in particular represents the continuation of a longer term trend. Spending on As ever, it remains unclear to what extent these health, which was 38% as a share of the Scottish spending changes might affect outcomes, whether budget in 1999 had reached 47% by 2018/19, economic, environmental or social. But the long- and could feasibly account for half of government term concentration of public sector spending resource spending by the time Holyrood debates the towards health, social care and (to a lesser extent) final budget of this parliamentary session. Chart 55. education – at the expense of many areas of cultural, economic and environmental areas - is Chart 55: Health spending in Scotland clear. 60% Forecast
50%
40% Looking beyond 2019/20
30% It is worth briefly looking beyond 2019/20 to consider the challenges lurking ahead for the final 20% two budgets of the parliament. Health budget resource of share Health 10% Budget 2020/21 looks ominously complicated compared to budget 2019/20. In principal, 2020/21 0% will see assigned VAT start to contribute to the Scottish budget, and around £1bn of social security
Source: Fraser of Allander analysis spending will be added to the budget. At the same time, 2020/21 will be the first year of income tax ‘reconciliation’ – where the budget will be adjusted to account for any forecast error in relation to the Local government has seen its core resource 2017/18 income tax forecast. settlement from government fall by around 8% in real terms between 2010/11 and 2018/19. Budget 2021/22 will be the last budget set in this Its response has been to prioritise spending on parliament before the Holyrood elections in May statutory areas of social work and education. As a 2021. A further £2bn of social security spending will consequence, spending on these areas has fallen come on stream.
27 Fraser of Allander Institute Parliamentary debates on this budget will potentially straddle the period during which the UK exits its transitionary arrangement with the EU. In some ways therefore, compared to the likely backdrop to the next two years’ budgets, the 2019/20 budget looks relatively unexciting; arguably a typical backdrop to a mid-term budget. But the 2019/20 budget could yet be blown off course. Westminster is expected to have its ‘meaningful vote’ on the Withdrawal Agreement on the 11th December, the day before the Scottish budget is presented. If MPs back the Agreement, the UK will in principle slide smoothly out of the EU at the end of March 2019 straight into a transitionary period. In principle this should leave Mr Mackay’s spending plans (and the SFC forecasts) relatively unscathed, and lay the way for the UK Government to go forward with its planned spending review later in 2019. If however parliament rejects the proposed Withdrawal Agreement – which is arguably the more likely outcome as things stand – then the possible scenarios range from the UK exiting the EU with no agreement in March next year, through to some combination of Article 50 extension, renegotiation of the Withdrawal Agreement, a general election and/or a second EU referendum. Quite how the 2019/20 budget might be affected by such events is unclear, but there could be implications for the UK fiscal plans (influencing the Scottish budget via the Barnett formula), and potentially substantial changes in tax forecasts. One thing that is clear is that, during the next two months of budget debate and negotiations, the Scottish budget will no doubt play second fiddle to Brexit as a news story. But we should not forget the importance of the budget statement, not only because it determines how much income and council tax we pay next year, but more fundamentally because of what it will tell us about the long term trends of public spending in different spheres of public policy intervention in Scotland.
Economic Commentary, December 2018 28
Competition policy and economic governance in an independent Scotland
Ewan Sutherland
Abstract
The SNP’s Sustainable Growth Commission updated an economic case for Scottish independence, based on strong future economic growth over many years, however without any discussion of the many institutions that would be required for economic governance and oversight to help meet such enhanced growth. An independent Scotland would require a new set of regulatory bodies – plus a system of appeals and sufficient democratic oversight by the Scottish Parliament. The Sustainable Growth Commission report draws heavily on the examples of Denmark, Finland and New Zealand whose models of economic governance and oversight vary considerably. This article reviews the constraints and freedoms that an independent Scotland would face in developing its future competition policy and economic governance.
Keywords: Scotland, Independence, Governance, Competition, European Union, Economic Governance.
I Introduction
The report of the Sustainable Growth Commission (2018) (SGC) to the Scottish National Party (SNP) proposed selecting and adapting economic policies and practices from small advanced nations − principally Denmark, Finland and New Zealand − to deliver a decade of economic growth at 2.5 per cent annually, then fifteen years at 3.5 per cent annually. However, the report does not discuss whether there would be the necessary institutional capacity. One key area is competition policy, encompassing the regulation of markets in general (e.g., abuse of dominance and merger control) and of specific sectors (e.g., energy and telecommunications), plus oversight of state aid. The report is vague on the general governance of the economy, concerning the institutions that would be required to draft, consult upon, refine, and oversee implementation of the various policies, aside from two notable exceptions: the creation of a Scottish Central Bank (SCB) and Scottish Financial Authority (SFA). This paper reviews the constraints and freedoms that an independent Scotland would face in developing its future competition policy and economic governance.
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The importance of institutions to economic growth was set out by North (1989), noting the importance of the ability to create institutions and the significance of path dependency. In Africa and Latin America, the lack of experience in the creation and maintenance of institutions hindered growth, in contrast to the successes of governments in the Asian tiger economies and China. The European Union has developed considerable capacity to devise institutions and to link them in governance networks, with regular revisions, arguably with excessive complexity. Whereas in the US, the pendulum swings between institutional development and efforts to roll it back. Current concerns focus on the types of institutions and policies need to regulate competition with two-sided and platform-based markets.
Section II reviews issues around competition policy in an independent Scotland. Section III analyses the economic governance of the SGC’s three exemplar countries. Section IV examines the options for economic governance and competition policy in an independent Scotland. In Section V, conclusions are drawn and issues identified for further research.
II Competition policy
The European Commission (EC) explains that:
Competition policy cannot shape a fairer economy on its own, but it can make an important difference: enforcing competition law ensures that there is a voice for the consumers. Competition policy contributes towards a society that gives people choice, stimulates innovation, prevents abuses by dominant players, and drives companies to make the most of scarce resources thus contributing to addressing global challenges like climate change. (EC, 2017a)
Competition policy has been a feature of the European project from the Treaty of Paris (1951), to the current Treaty on the Functioning of the European Union (TFEU, 2007). The relevant articles address:
. Antitrust and cartels; . Merger control; and . State aid control.
The EC is a competition authority, promoting a competition culture and handling cases that have a European dimension, or relate to state aid (EC, 2018b), supplemented by the work of European regulatory networks (ERNs) (Maggetti & Gilardi, 2011). Competition experts from the member
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states (MSs) sit on an advisory committee that discusses draft EC decisions and some cases being decided by national competition authorities (NCAs) (EC, 2003). The EC and the NCAs also cooperate through the European Competition Network (ECN), for example, publishing a report on online hotel bookings (EC, 2017b).
Figure 1 State aid as a percentage of GDP (excluding railways) (EC, 2017c)
Hungary Denmark Latvia Czech Rep. Germany Croatia Poland Finland Lithuania Estonia Sweden Slovenia Bulgaria Cyprus France Romania Belgium Austria Malta United Kingdom Slovakia Greece Portugal Netherlands Luxembourg Spain Italy Ireland 0.0 0.5 1.0 1.5 2.0 2.5
MSs are required to have an independent NCA and a system of appeals, plus regulators for a number of economic sectors, each linked through ERNs, for example, for electricity. There is no standardised model; rather each MS has the freedom to design its own governance structures. For example, in Estonia the Konkurentsiamet combines the NCA and the regulation of all economic sectors, whereas a majority of MSs keep at least their competition authority separate. The United Kingdom has combined broadcasting, posts and telecommunications into a single
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body, the Office of Communications (OFCOM),1 plus a range of other ‘offices’ (i.e., non- ministerial departments). In 2014, the United Kingdom merged the Office of Fair Trading (OFT) and Competition Commission to create the Competition and Markets Authority (CMA).
State aid involves a company receiving government support that gives it an advantage over its competitors, consequently being prohibited under EU treaties, unless justified for economic development. Such exemptions are controlled by the EC and the ECJ to avoid distortions of the single market, reviewing funds to be provided by any level of government, from municipalities up to the European Investment Bank (EIB). The extent of state aid varies greatly (see Figure 1). Despite claims by the Labour Party that EU membership would constrain a putative UK Labour Government, it could, at least, double the level of state aid and remain within the framework. However, it would be more difficult to nationalise industries or to provide them with special status, given EU limits on golden shares and special rights (Putek, 2004; Werner, 2017).
An independent Scotland would certainly become a member of the Organisation for Economic Cooperation and Development (OECD)2 observing its various recommendations, including its present economic strategy Going for growth (OECD, 2018). It would become a signatory to its various legal instruments, notably the Convention on Combating Bribery of Foreign Public
Officials in International Business Transactions.3 Implementation of anti-corruption policies and treaties would require creation of a unit comparable to the Serious Fraud Office (SFO).4 There has been concern about money laundering through limited partnerships registered in Scotland (Leask & Smith, 2018; BBC, 2018a). OECD membership includes participation in its many committees and working parties, effectively governance networks, discussing policy issues and measures to improve outcomes, including peer reviews. A Scottish NCA would be expected to participate in:
1 OFCOM also has sectoral competition law powers. 2 There is a complex legal argument over whether an independent Scotland must join or, as a successor state, it acquires some or all of the United Kingdom treaty obligations. 3 Economic crimes would require the retention of the Bribery Act, with the capacity to enforce it, presently reliant on the Serious Fraud Office (SFO). 4 Scotland would also be expected to ratify and implement the UN Convention against Corruption (UNCAC) and the Criminal and Civil Conventions on Corruption of the Council of Europe, cooperating in the work of the Group of States against Corruption (GRECO). Economic Commentary, December 2018 32
. OECD Competition Committee (and its working parties); and . Global Forum on Competition.
As an independent state, Scotland would have to adopt a framework for competition policy, indicating some level of intervention in the economy and to create institutions covering the role of the current UK regulators:
. Competition Appeal Tribunal (CAT); . United Kingdom Regulators Network; . Civil Aviation Authority (CAA); . Financial Conduct Authority (FCA); . Payment Systems Regulator (PSR); . Office of Communications (OFCOM); . Office of Gas and Electricity Markets (OFGEM); . Water Services Regulation Authority (OFWAT); . Office of Rail and Road (ORR); . Single Source Regulations Office (SSRO); and . Financial Reporting Council (FRC).
The Water Industry Commission for Scotland (WICS) is the sole regulatory body that presently serves only Scotland, though some United Kingdom bodies have representative offices. While the Scottish courts can hear competition law cases, there has been remarkably little litigation before the Court of Session, partly because the geographical definition of markets is generally either the United Kingdom or Europe. The success of the CAT would favour the creation of a similar specialist tribunal in Scotland, from where cases could proceed to the Inner House of the Court of Session and, potentially, to a Scottish Supreme Court.
Independence, in the sense of institutions rather than the state, is essential in economic regulation to protect decision-making from political interference, an issue avoided both by the SGC and by the SNP in its 2014 independence referendum campaign. Nonetheless, there are EU acquis obligations requiring the institutional independence of a number of agencies and widely accepted evidence that economic performance and the quality of governance are improved thereby (Gilardi, 2002; 2005; 2007; Guidi, 2015; Maggetti, 2009). A challenge faced by the EU
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has been to convince some accession countries of the benefits of making institutions genuinely distinct and separate from government, freeing their decision-making from ministerial influence, especially media regulators. In smaller countries, institutional independence can be problematic, given that many individuals know each other from school, university, work or socially.
Regulatory capture is an extreme form of influence, in which agencies act for regulated firms rather than for citizens and the economy. To prevent this, measures to typically address include (Laffont & Tirole, 1991; Dal Bó, 2006; Hong & Kim, 2017):
. Clarity of legal powers; . Appellate systems; . Collegiate boards with staggered renewal dates for commissioners; and . Delays on individuals taking up posts in regulated firms.5
More challenging than the design of the future competition policy and institutions would be the transition from the current United Kingdom governance to a future Scottish governance. The simplest option would be to roll-over a list of relevant statutes and statutory instruments, adding “Scottish” to the names of the current institutions and legislation to avoid confusion, and to begin recruiting qualified and experienced people for the various agencies. Licences could be split at the border, ‘grandfathering’ the existing conditions and made subject to Scottish regulators and courts. However, this could not wait for independence, but would require agencies, licences, policies and parliamentary oversight arrangements to be operational much earlier. It would be necessary to draft legislation during a referendum campaign, so that in the event of a vote for independence, the Scottish Parliament could immediately be given the powers to scrutinise and enact essential legislation, in order that agencies could be brought into existence in good time. To ensure a smooth transition the agencies could then rent offices, recruit staff, develop computer systems, and begin to consult on their policies and on the adaptation of licences. An area of concern could be Scotland’s small market size, the sometimes challenging geography and low population density, which operators could claim justified higher retail or wholesale tariffs, to compensate for their inability to spread the costs over a larger
5 To avoid the ‘revolving doors’ problem. Economic Commentary, December 2018 34
population.6 The new agencies would have to create coordination mechanisms with each other and with their counterparts in the rest of the United Kingdom and the EU, notably where market definitions included both Scotland and the rest of the United Kingdom or had a European dimension.
The transition would require input from business users and consumers to the many consultations, activities that are presently concentrated in Brussels and London. This would be likely to require additional funding, training for existing organisations and the creation of new organisations. For example, Scottish Ministers have rarely published regulatory impact assessments (RIAs), which are commonly used by regulators in their consultations, requiring sufficient understanding by parties planning to respond. Good governance relies on informed responses to consultations and periodic appeals to the courts, which require engagement, funding, and skills.
In addition to the headline agencies, there is a wide range of other bodies presently involved in market governance. For example, Table 1 shows the array of bodies in and around the telecommunications sector, the functions of which, if not their structures would have to be replicated.
The issues of competition and regulatory policy in an independent Scotland are unavoidable. They are not especially contentious, since in the first instance they would entail rolling over existing UK institutions and policies, making only essential changes and then organising regular reviews of laws, policies and institutions. The metagovernance priority would be to ensure a smooth transition and parliamentary oversight of institutions.
6 Presumably London-based regulators would try to reduce prices and tariffs for the same reason.
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Table 1 UK regulatory institutions in the ICT sector (Sutherland, 2017)
Name Status Functions Advertising Standards Regulator of advertising across all media, including marketing on Independent Authority (ASA) websites Competition and Markets Non-ministerial The CMA is the UK national competition authority (e.g., merger Authority department control). Handles some appeals from OFCOM Office of Communications Non-ministerial OFCOM is sector and competition law regulator for broadcasting, (OFCOM) department‡ posts, and telecommunications Communications and Internet CISAS provides customers of communications companies (e.g., Services Adjudication Scheme Independent* telephone and broadband) with free, independent dispute resolution Ombudsman Services – Resolves complaints from consumers about phone and broadband Independent* Communications companies Telephone Preference Service An opt-out service for customers wishing not receive to unsolicited Independent* (TPS) sales or marketing calls Office of Telecommunication Oversees co-operation between communications providers and Independent* Adjudicator (OTA2) enables a competitive environment Broadband Stakeholder Group Independent‡ UK government’s advisory forum for telecommunications Network Interoperability (NICC) Technical forum that develops interoperability standards for public Independent communications networks and services Competition Appeal Tribunal Specialist judicial body with expertise in law, economics, business (CAT) Judicial and accountancy, that hears and decides cases involving competition or economic regulatory issues General Communications Works with other intelligence agencies, other departments, law Headquarters (GCHQ) Government enforcement and industry to defend government systems from department cyber threats and strives to keep the public safe, in real life and online. National Cyber Security Centre Helps protect critical services, managing major incidents and (NCSC) Part of GCHQ improving the security of the UK Internet through technology and advice to citizens and organisations Interception of Reviews the interception of communications and the acquisition Non-ministerial Communications and disclosure of communications data by intelligence agencies, department Commissioner’s Office (IOCCO) police forces and other public authorities Investigatory Powers Tribunal Investigates & determines complaints alleging that public (IPT) Judicial authorities or law enforcement agencies have unlawfully used covert techniques and infringed our right to privacy Gambling Commission Non-departmental Regulates commercial gambling and the National Lottery public body‡ Information Commissioner’s Upholds information rights in the public interest, promoting Independent Office (ICO) openness by public bodies and data privacy for individuals Internet Watch Foundation Maintains UK hotline for reporting criminal online content Independent (IWF) UK Council for Child Internet A group of more than 200 organisations including government, Government led Safety (UKCCIS) industry, law, academia and charity sectors that works to help keep body children safe online UK Safer Internet Centre SWGfL, Childnet International and IWF - promoting the safe and Partnership responsible use of technology for young people Child Exploitation and Online Dedicated to eradicating the sexual abuse of children Police Protection Centre (CEOP) * Approved by OFCOM ‡ sponsored by the Department for Digital, Culture, Media and Sport (DCMS).
Economic Commentary, December 2018 36
III Regulatory landscapes in three small nations
The SGC drew on experiences from three advanced small states:
Denmark; Finland; and New Zealand
The first two are EU member states which helped produce and are in full compliance with the EU acquis, and are deeply embedded in EU institutions. While Finland is in the Eurozone, the Danish Krona is only pegged to the Euro. Both follow the ‘Nordic model’, being small, open economies delivering stable and sustainable growth, with ambitious welfare systems and comprehensive public sectors financed by high taxes. New Zealand is quite different being a group of rather remote Pacific islands that was formerly in the British Empire.
The three differ greatly in their economic, physical and political geographies (see Table 2); Denmark has a much higher population density, while New Zealand has markedly lower government revenues and taxes. Picking elements of their competition, economic and regulatory policies would require very detailed analysis, identifying particular circumstances and path dependencies, then judicious adaptation. Figure 2 shows the GDP growth of the three, together with that of the United Kingdom, while Figure 3 shows GDP per capita, neither of which suggests that the three smaller nations have outperformed the United Kingdom to any significant extent.
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Table 2 Demark, Finland, New Zealand and the UK compared
New United Indicator Units Denmark Finland Zealand Kingdom
Population millions 5.8 5.5 4.8 66.6 Population density per km2 136 16 18 276 Life expectancy years 79.5 81.0 81.3 81.8 GDP per capita (current prices) USD 53,730 43,339 40,233 40,249 Real GDP growth % pa 2.0 2.6 3.1 1.4 Government revenue % of GDP 53.1 54.4 39.2 38.0 GINI co-efficient score 28.2 27.1 - 33.2 Doing Business rank 3 11 1 7 FDI – Net inflows USD millions -2,266 10,851 3,237 64,685 FDI – Net outflows USD millions 13,309 11,155 486 147,078 score 0.929 0.920 0.917 0.922 Human Development Index rank 11th 15th 16th 14th
Sources: CIA, IMF, OECD, UNDP and World Bank
Figure 2 Real GDP annual growth (IMF, 2018a)
8
6
4
2
0
-2
Denmark Percentage -4 Finland -6 New Zealand -8 United Kingdom
-10
1998 1982 1984 1986 1988 1990 1992 1994 1996 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 1980
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Figure 3 GDP per capita, current prices PPP USD (IMF, 2018b
70,000
60,000 Denmark Finland 50,000 New Zealand 40,000 United Kingdom 30,000
20,000
10,000
0
1988 1980 1982 1984 1986 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
(i) Demark Denmark is a member of networks of competition authorities in the Nordic region, EU and OECD. It is also a member of the International Monetary Fund (IMF), which analyses its policies annually, observing that: “Competition in the services sector could be improved further by enhancing the powers of the Competition Council in relation to companies breaching regulations and exploiting their dominant market position” (IMF, 2018c). Its competition policy has been peer reviewed by OECD countries (OECD, 2015). Its government established a Productivity Commission (Produktivitetskommissionen, 2014) that identified steps to be taken to improve productivity that had been lagging other economies, especially larger economies.
In 2010, the Danish Competition Authority and the Danish Consumer Agency (itself the result of a previous merger of the Danish Consumer Complaints Board and the Danish Consumer Ombudsman) were merged to become the Danish Competition and Consumer Authority (DCCA), activities which the government argued were closely related. Unusually, the DCCA lies within the Ministry of Business and Growth, rather than being an independent executive agency. In matters of the enforcement of the Competition Act, the Competition Council and the DCCA are independent of the minister. However, enforcement of the Competition Act is split between the
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DCCA and the public prosecutor, only the latter can initiate prosecutions for the imposition of fines. Legislative amendments from 2015 provided greater independence from the Ministry and a more streamlined and expert Competition Council, its decision-making body.
(ii) Finland Finland is also a member of the networks of the IMF, EU, OECD, and Nordic countries, with the corresponding analyses, reports and statistics. Its economy is presently considered to be performing well:
Robust output growth is projected on the back of a rebound in exports and continued strength in domestic demand. Private consumption will keep growing steadily in 2018, thanks to a rise in earnings and employment. (OECD, 2018, p. 139)
In the second half of the 20th century, economic and social development of Finland was a success, the result of continuous investment in education, research and innovation, enabling the transition from a largely resource-based to a knowledge-based economy, adopting high- technology manufacturing and knowledge-based services. However, it was hit hard by the 2007 global financial crisis and by technological disruptions that almost destroyed the mobile handset business of Nokia (Doz & Wilson, 2017), leading to a sharp drop in ICT exports and business enterprise R&D (BERD). It also lost ground in terms of productivity and competitiveness. Nonetheless, Finland retains substantial innovation capabilities and is considered able to diversify from the relatively narrow range of industries in which it has enjoyed comparative advantage. A review of innovation policy suggested strengthening the focus and level of spending both on established industries and on building new export strengths (OECD, 2017).
In 2013, the Finnish Competition Authority and Finnish Consumer Agency were merged to form the Kilpailu- ja kuluttajavirastosta (KKV, 2018) or Finnish Competition and Consumer Authority. The EC noted it had increased competition in services, in response to its country-specific recommendation (EC, 2018c). A peer review found regulatory agencies had limited independence, reporting to and being closely tied to parent ministries, unlike many other EU countries (OECD, 2010). Reforms to the constitution had strengthened the role of parliament in public governance and enhanced the role of the courts. A previous review noted the need to
Economic Commentary, December 2018 40
continue to improve the regulatory framework and reduce the administrative burden to increase competition in services and to promote investment (OECD, 2003).
(iii) New Zealand Geographically, New Zealand is remote. Entry into its market is more difficult than is the case in Demark or Finland, since it is not part of a larger single market and there are few ways for businesses to share costs with operations in its neighbours, such as Australia, Chile, Hawaii or the Pacific island states. Politically, it has undergone major policy innovations, enabled by first- past-the-post rather than proportional voting system combined with its unicameral parliament that allows governments an unusually free hand to effect change. In 1984 New Zealand:
…embarked on what evolved into one of the most comprehensive programs of economic reform of any OECD country in recent decades (Evans, Grimes, Wilkinson, & Teece, 1996, p. 1860).
Government departments that provided services were converted into state-owned enterprises (SOEs), many were privatised, stripped of any provision of policy advice and the administration of government programmes. Industry and competition policies focused on developing a competitive environment, with markets determining commercial outcomes, without support for any economic sector (Bridgman & Barry, 2002). What had been one of the most interventionist of the OECD economies became one of the most open and market-based. Under the Commerce Act of 1986, competition policy aimed to minimise governmental and regulatory interventions, relying instead on actual and potential competition to regulate prices and monopoly behaviour.
New Zealand has a productivity problem, partly attributed to firms not learning from global leaders in their sectors, the weak diffusion of technology and the survival of poorer performing firms in the absence of market entry due to geographic isolation (Conway, 2018). Firms generally have weak international connections and do not participate in global value chains (GVCs), while there is limited inward and low outward FDI. As much as 40 per cent of the productivity gap compared with the OECD average reflected weak investment in knowledge-based assets (Serres, Yashiro, & Boulhol, 2014). Its economic growth has been achieved by increased participation in the workforce.
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(iv) All three country examples considered The three examples highlight the complexities of path dependencies, institutional histories, and political constraints that influence regulatory design and practice. At one extreme lies New Zealand, with its low taxation and avoidance of state aid, made possible by its unicameral majoritarianism, while Denmark and Finland are tied into multi-level governance networks of the Nordic states and the EU. While these limit their freedom to innovate or differentiate in policies, they also provide reinforcement for the advocacy of pro-competitive policies and practices. It is likely that an independent Scotland would lie somewhat closer to that of Denmark and Finland than to New Zealand though if it remained a unicameral parliament it would have the potential for quite rapid change.
IV Good governance in an independent Scotland
The SGC had little to say about governance or the design of institutions and systems. Insofar as it described policy-making and implementation in its hypothetical independent Scotland it was as a collective process, in which many parties would be subject to Gramscian co-optation to arrive at a broad consensus (Cox, 1983). While there would be yet more non-departmental public bodies (NDPBs) to advise government, there was no discussion of the scrutiny of their creation, appointment of officials, processes or outputs, or the roles that might be played by citizen juries, media, or town hall meetings. Nor was the issue of judicial review in the Court of Session addressed nor a possible supreme court, though this would surely become more frequent, requiring the applicable criteria to be weighed carefully (Auburn, Moffett, & Sharland, 2013; Knight, 2018). The emphasis was on answers, rather than on discussing the creation of high quality institutions and processes that would ensure the long-term decision-making needed to maintain rapid growth.
The Scottish Parliament
Perhaps the most critical issue of all is the role of the Scottish Parliament, which would undoubtedly have a major role in the negotiations for and transition to independence, then a continuing role to ensure accountability and transparency of government and agencies, with its members in turn being held accountable in elections. Independence would greatly increase the powers of Scottish Ministers and, presumably, their numbers, requiring a comparable increase in the range of committees and the time for questioning ministers in the Scottish Parliament.
Economic Commentary, December 2018 42
The present arrangements for committees reflect an ever-changing and ephemeral composition of ministerial portfolios, which limits the capacity of committee members to develop subject expertise and thus reduces their effectiveness (Arter, 2004; Cairney, 2006; Halpin, MacLeod, & McLaverty, 2012). Minimally, there would need to be more committees to oversee additional ministers and agencies, ideally with portfolios decided by the Scottish Parliament − rather than the First Minister − and with elected rather than appointed convenors. The committees need to be reinforced with more staff and the hiring of more experts to support specific studies. In addition, the issue of conflicts of interest would have to be explicitly addressed.
A second chamber?
An argument could be made for a second or deliberative chamber, representing the diverse geography of Scotland, comparable to the German Bundesrat or the US Senate. (Diermeier & Myerson, 1999; Rogers, 2003; Benz, 2018). However, the three small countries referenced in the SGC report all have unicameral legislatures. The challenges would be decide if and how to create a second chamber or senate, a body better able to deliberate and to take a longer term and wider geographic view of legislation and policies. It would be vastly smaller and more democratic than the House of Lords, but perform similar functions.
Think Tanks
A further gap is in the capacity of think tanks and similar organisations, which have typically been located in London and in Brussels. While these have grown over the years of devolution, they would need to be boosted in capacity, geographic coverage and numbers, while ensuring they remained independent. The value of critical voices should not be understated.
Mergers
At present, the acquisition of companies listed on the London Stock Exchange (LSE) is handled by The Takeover Panel using its code, an arrangement that would presumably continue.7 These arrangements would seem likely to remain in place. A somewhat similar arrangement applies with the Advertising Standards Authority (ASA) with its codes, though logically this should be
7 http://www.thetakeoverpanel.org.uk/
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replicated. It could be argued that such governance activities ought to be brought under a statutory agency directly responsible to the Scottish Parliament.
Press regulation
A contentious area of regulation would be the press, where there are no easy solutions and regulation is presently asymmetric with broadcasting and the Internet. By Royal Charter, HMG created a meta-regulator, the Press Recognition Panel (PRP), to determine whether press regulators meet the criteria recommended by the Leveson Inquiry. There are two regulators, the Independent Press Standards Organisation (IPSO) covering most national newspapers, and IMPRESS for a smaller number of outlets, only the latter has been recognised by the PRP. In addition to questions about the form of media regulation, a question arises about the Privy Council, which approves Royal Charters, not only for the PRP but also for universities and many other bodies. The Scottish Privy Council has apparently not met since 1706 and its revival could be considered anachronistic, opening the question of more modern processes and organisations.
Infrastructure: housing and transport
The high levels of economic growth call from continuous work on building houses and infrastructure. This would need to avoid unnecessary blockages of NIMBY-ism, such as opposition to the construction of new housing, railways and roads. Clearly, there are lessons to be learned from careful analysis of the failures of the Edinburgh tram scheme, the delays in the Network Rail electrification of the Edinburgh-Glasgow rail link and the interminable discussions of a rail link to Glasgow Airport.
The digital economy and data protection
Given the importance assigned to digitalisation of the economy in the SGC report and talk of a ‘Fourth industrial evolution’ (4IR), data protection would be critical. The present framework is the General Data Protection Regulation (GDPR) 2016/679,8 transposed as the Data Protection
Act 2018,9 enforced by the Information Commissioner’s Office (ICO) in the United Kingdom, with coordination through the European Data Protection Board (EDPB).10 Brexit takes the ICO out of
8 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32016R0679 9 http://www.legislation.gov.uk/ukpga/2018/12/contents 10 Formerly the Article 29 Working Party. Economic Commentary, December 2018 44
the EDPB and removes from citizens the unique protection of Article 8 of the European Union
Charter of Fundamental Rights, a unique right to data protection.11 The EU combination of laws and institutions represents the highest level of data protection. Independence would require Scotland to replicate the ICO, the Data Protection Act 2018, and, if an EU MS, to sign up to the Charter of Fundamental Rights. A Scottish ICO would have to ensure organisations complied with the GDPR.
Rather than try to answer questions definitively, it would have been useful had the SGC recognised the importance of the systems that would be used to govern the economy of its independent Scotland. Delivery of high levels of growth and of improved productivity would require the development of institutions fitted to the communities of interest in Scotland.
V Conclusions
The report by the Sustainable Growth Commission gives insufficient weight to the importance of metagovernance for a democratic society. The very high targets for growth necessitate careful formulation of economic policies, detailed planning, thoughtful implementation and scrupulous oversight, rather than calling for everyone to put their shoulders to the wheel in some kind of Stakhanovite endeavour. The design of institutions and processes, must aim for systems that achieve and maintain high levels of growth, and ensure equally high levels of accountability and transparency. It would be necessary to avoid problems of economic overheating, by pre- emptively addressing bottlenecks, such as in the supply of skilled labour, housing and transport, requiring coordination across a wide range of government directorates and agencies, some of them newly created, at a time of considerable disruption. Overheating could increase inflation, putting pressure on a future Scottish Central Bank, which itself would be constrained by the SGC’s choice of sterlingisation.
A key omission is any discussion of the role the Scottish Parliament, creating massive gaps in oversight and a potentially large democratic deficit, at a time when Scotland would need to overcome deep divisions. Parliamentary scrutiny would require a substantially strengthened set of committees with functional specialisations to hold ministers, officials and the burgeoning agencies to account. This would be true in the medium term, but also in the short term,
11 Other treaties are limited to privacy, from which data protection has to be inferred.
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especially in overseeing the transition to independence and scrutinising the voluminous legislation. Independence necessitates new structures, new processes and, potentially, a second chamber to reflect Scotland’s geographical diversity and to enhance deliberation and scrutiny. Equally, a new constitutional or supreme court might be needed.
Aside from banking, there is a need to discuss the institutions that would be required in a putatively independent Scotland. One answer is to simply replicate or roll over existing UK laws and institutions – and this could be a short term response to not scare the horses. However, further consideration is needed of how such institutions would be created, and (crucially) be made independent of Scottish Ministers. It raises the medium term question of how coalitions of interest might wish to shape those institutions in ways different from today – towards a co- ordinated market economy (CME) or a liberal market economy (LME) and, more importantly, how is that to be decided?
If nothing else has been learned from Brexit, it is the importance of customs agreements in a globalised economy. Given centuries of integration in a customs union with England, Wales and Northern Ireland, the negotiation of a replacement agreement between an independent Scotland and rUK would seem likely to be difficult, especially if Brexit had gone wrong. The omission of the difficulties of negotiations and the likely economic costs of the different scenarios needs to remedied
Having lived through Brexit, it is unstainable to now simply ignore the potentially difficult transition from the present day institutions and policies of the United Kingdom to those of an independent Scotland. Unsuccessful management of any transition could result in the loss of firms and the consolidation of markets in ways that would diminish growth, hurt consumers, constrain wages and limit future options. Companies presently engage with and understand the rules of the United Kingdom, admittedly confused by the very significant uncertainties of various “hardnesses” of Brexit. They would have to learn about the new institutions and policies of an independent Scotland, and create new capacity for lobbying and litigation. Some firms might view this as unwelcome, with additional costs and the need to coordinate with their United Kingdom activities, consequently preferring to sell to a local firm or individuals with greater expertise in and knowledge of Scotland’s courts, politics, public administration and regulations.
None of the institutional requirements is especially difficult, given sufficient planning, nor need they be contentious. It would be possible to expand some existing institutions, while replicating Economic Commentary, December 2018 46
United Kingdom models for others, in some cases building on their limited operations in Scotland. In time, it would be appropriate to conduct reviews and to revise the structures, requiring formal mechanisms, perhaps aided by the proposed Productivity Commission. It would also be necessary to be ready to take part in - and learn from - international governance networks such as the OECD and, perhaps, the EU. In the area of competition policy, it would be essential to establish relationships with the pre-existing bodies in the United Kingdom, in order to be able to consider jointly mergers and cross-border issues, such as physical distribution and transport. Denying the administrative challenges in creating institutions and cross-border arrangements would be to repeat the grave errors of the Brexiteers.
None of the issues are insurmountable, indeed many may not be. However, in any future prospectus for an independent Scotland – especially given the painful UK and Scottish experience of Brexit – it is vital that issues of economic governance, including competition policy, are addressed to ensure a smooth and successful transition to a high growth independent Scotland.
Author details: Ewan Sutherland Visiting Adjunct Professor at LINK Centre University of the Witwatersrand, South Africa [email protected]
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Economic Commentary, December 2018 52
Water as an economic resource and the impacts of climate change on the hydrosphere, regional economies and Scotland
Scott J. McGrane†, Grant J. Allan and Graeme Roy
Abstract
There is increasing evidence that the global climate is changing and that this will have implications for the future of water resources. The impacts of climate change will be transmitted primarily via the global hydrosphere, whereby changes in rainfall patterns and the frequency and magnitude of extreme weather conditions (e.g., flood and drought) will result in significant challenges, including for the way we access, manage and use freshwater resources. In addition, water demand will continue to rise to support a growing global population and its resultant increases in food and energy needs. There are likely to be variations across the globe in climate change impacts and these will further exacerbate existing spatial disparities in water availability. Water is a critical component for all aspects of life, and is particularly significant in many economic activities (e.g. agriculture, energy etc.). Changes in water availability and hydrological extremes will impact at regional and global scales on economic activity, supply chains, key industries and migration. While all regions of the world will be impacted by climate- induced water stress, regions with robust water policies and water management strategies, or at the leading edge of water-technologies may see opportunities. Here, we discuss the projected impacts of climate change on water resources, and the challenges and opportunities this poses for economic activities in Scotland, including Scotland’s readiness to adapt to changes in water availability.
Keywords: Climate change, water resources, economic growth, water policy, Scottish economy
Corresponding author: †[email protected]
I Introduction
Water is the most critical natural resource available to humanity. However, water resources are currently threatened by systemic global changes as a consequence of climate change, population growth and urbanisation, and represents one of the world’s most critical challenges (World Economic Forum, 2018). As a resource, water is vital to the emergence and survival of societies, ecosystems and economies, and has played a critical role in the development, advance and collapse of civilisations (Sivapalan, Savenije, & Blöschl, 2012). Of the total global
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water supply (some 70% of the Earth’s surface), 97.5% is saltwater (oceans), with only 2.5% freshwater. However of that potable resource, 70% is locked in polar ice-caps, and a further 29% is located in deep groundwater stores, which are too deep or expensive to access and use. Globally, the potable water supply comes from the remaining 0.01% of freshwater that is readily accessible in lakes, shallow groundwater and rivers, which in turn present a range of accessibility challenges globally. Spatial and temporal disparity occurs globally, with around one-third of the global population lacking access to clean, safely managed water supplies (United Nations, 2018).
Today, as the global population grows toward 9 billion, global water resources are under increasing pressure, not just for drinking water itself, but also for food and energy production, which are significant end-users of water (Kummu et al., 2016; Sušnik, 2015). Increases in demand for water, energy and food are occurring simultaneously with the impacts of climate change, altering the spatial and temporal reliability of existing freshwater resources. The hydrosphere12 represents a key medium through which the impacts of climate change will be transmitted to all aspects of society, the environment and global economy (Barnett, Adam, & Lettenmaier, 2005).
Climate change presents two vital water-centric challenges: (i) ensuring the global population has access to critical water resources, (ii) mitigating against the risks posed by an increase in frequency and magnitude of environmental hazards such as floods, droughts, storm surges and sea-level rise (Kundzewicz et al., 2018). Although our understanding of the mechanisms of climate change have advanced considerably in recent decades, our readiness to deal with these changes remains a major challenge for politicians, policy makers, water managers and utility providers alike (Azhoni, Jude, & Holman, 2018; Eisenreich, 2005).
The impacts of environmental change will have a profound effect on global and regional economies. Changing resource availability, changing weather patterns, migration of people, and changing patterns of demand for particular goods and services will affect the nature and structure of economic activities in a water stressed future. Many of these changes are already evident. Prolonged periods of drought have significantly reduced available water supplies in
12 The hydrosphere, also known as the water cycle, is the movement of water around the Earth’s surface, and includes evaporation from oceans, precipitation, water storage (as snowpacks, in lakes, in soils, in groundwater) and runoff from the land and rivers, back to the oceans. Economic Commentary, December 2018 54
Cape Town, and promoted mass migrations to Europe and North America (Missirian & Schlenker, 2017)), while record-setting weather events and destructive climatic extremes - such as the wildfires in California, the floods in Southern Europe and devastating typhoon and hurricane systems in parts of Asia, the Caribbean and North America - are occurring with increasing frequency and magnitude.
In this paper, we explore the consequences of environmental change for the hydrosphere, and explore what this means for national and regional economic activities. The paper addresses what such changes could mean for the Scottish economy, and provides a series of observations on current trends of water-use within the Scottish economy before concluding with recommendations on how Scotland can best prepare for changing patterns of water availability as a consequence of the future changes to this critical element of the global natural environment.
II Water and the economy
Water has played a critical role in the growth and collapse of ancient economies and is a critical component of contemporary economic activity. According to the World Bank, globally, about 92% of freshwater withdrawals support agricultural activities (including irrigation, drinking water for livestock and cleaning of equipment) (World Bank, 2018). Water is also an integral component of energy generation, especially electricity production where water is used for both steam generation and cooling, as well as directly in hydroelectric power schemes.
The effects of climate change on the hydrosphere has resulted in regional disparity in the availability and uses of freshwater resources, impacting regional economies as a result. Episodic events, such as the prolonged drought in Cape Town earlier this year, highlight the fragility of a disrupted resource on a whole urban economy whose impact was ultimately observed in the macroeconomy (Gallie, 2018). Loss of revenues from water charges, loss of tourism, and significant output reductions in agriculture and horticulture (-33.6% Q1), mining (- 9.9% Q1), and manufacturing (-6.4% Q1) resulted in a contraction of the South African economy by -2.6% 2018 Q2 and -0.7% in 2018 Q2 (Figure 1).
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Figure 1 South African economic growth rates (quarter on quarter, seasonally adjusted and annualised) from 2014 (Q1) to 2018 (Q2), emphasising the effects of the 2017/18 drought on GDP.
Source (Stats South Africa, www.statssa.gov.za)
Regions that experience chronic periods of drought and low rainfall, while continuing to maintain economic activity, provide useful examples of resilience and adaptive economic behaviours. For example, California is the fifth largest economy in the world ahead of the United Kingdom and France. While its $2.7 trillion economy is bolstered by a thriving tech and entertainment industries, California also boasts significant agriculture, viticulture, tourism and manufacturing industries that are intensive users of water, often resulting in California’s exports having an embedded high water footprint13 (Fulton et al., 2012). Improvements in water management, improved water-use efficiency technologies, the development of water cap and trade markets14 and enhanced underground water storage facilities have equipped California to weather prolonged droughts while continuing to supply competing economic demands for
13 A water footprint is the cumulative volume of water consumed across the entire supply chain of a particular product. For a business, individual, region or country, it represents the total water embedded in the goods that are imported or consumed. A water footprint is a multidimensional indicator and captures the type of water used (i.e. “blue water” is from surface or subsurface stores such as lakes, reservoirs or rivers; “green water” is precipitation that is stored in soils, and “grey water” accounts for wastewater and a measure of the pollution associated with a particular activity) in addition to the location and timing of water use. 14 These markets operate in a similar fashion to carbon trading markets, whereby caps are set on water usage (and pollution levels), and regions with high consumption rates can buy credits from other regions where consumption rates are much lower to offset their own use. Economic Commentary, December 2018 56
water. An on-going programme of investment in infrastructure and technological development has enabled California to sustain successful economic output in light of challenging environmental conditions (Hanak et al., 2003).
A country’s water footprint measures the amount of water use globally which is implicit in the consumption of goods and services at a national level, and includes the water footprint of imported goods (and services). Take the example of coffee, one of the most traded commodities in the world (behind crude oil and derivative products) which is worth $100 billion (US) to the global economy. Coffee beans are grown in over 60 countries across Asia, Africa, Central and South America, and the Caribbean, where a particular narrow climatic range facilitates their ideal growing conditions (Figure 2). As rainfall patterns shift and changing global temperatures impact the migration of pests and diseases, the cultivated area of coffee production could reduce by half (Bunn et al, 2015). The change to rainfall patterns will also reduce the availability of water for crop irrigation, hindering crop yield and quality. This will not only impact the near 100 million people that are sustained by the agro-industry and supply chains of coffee production, but will also result in significant exports of water-intensive products from water stressed regions, impacting on domestic water security. Demand is likely to remain high even as the resource abundance diminishes, and as a result, trade in products like coffee will result in significantly high water footprints for importing countries with high consumption of such produce, in addition to sustaining elevated demands in water marginal countries.
Similar impacts will be experienced across a number of industries that rely on seasonal rainfall or runoff from melting glaciers and snowpacks. For example, agricultural irrigation in California relies on regular melt from snowpacks in the Sierra Nevada mountain range, which have seen both annual reductions in accumulated snow mass, and earlier spring runoff rates due to increased temperatures (Schwartz et al., 2017). Similarly, areas of the South American Andes rely on tropical glaciers15 as a buffer against highly seasonable rainfall patterns. Climate change has resulted in significant loss of glacial mass in this region, resulting in significant challenges for socioeconomic activities that rely on a regular water supply. Buytaert et al., (2017) estimate that the cities of La Paz (Bolivia) and Huaraz (Peru) rely on glacial melt for around 15% and 19%
15 Tropical glaciers are located high in the equatorial mountain ranges of the Andes (South America), East Africa and Papua Indonesia
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of their annual total water supply, respectively. During drought years, these contributions can increase to 16% and 27%, with significant increases in monthly contributions during peak drought months reaching 86% and 91%, as more local sources are depleted. While these urban conurbations have large water storage capacity in interconnected lakes and reservoirs, rural areas rely on runoff from montane regions and are particularly vulnerable to changing climatic regimes. These are often important agricultural communities, as well as home to large hydroelectric production schemes, meaning that changes in reliable water resources can additionally affect food and energy security for the broader nation as a whole.
Figure 1: External agricultural water footprint of the UK (million m3/year) and degree of water stress within that country16.
Source: (Hoekstra & Chapagain, 2006
16 Group A has a high export footprint to the UK but low water withdrawal compared to available water. Group B countries have low export footprint to the UK and low water withdrawal compared to available water. Group C countries have a low export footprint to the UK but significant water stress, and Group D countries have high export footprints to the UK with significant water stress
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Figure 3: Top: Major coffee growing regions of the world (Source: NOAA) and Bottom: project impacts of climate change on crop yields by 2050
Source: World Resources Institute
III Scotland’s economy and climate change
Scotland has abundant water resources as a result of its wet maritime climate.17 Annual rainfall in Scotland averages 1.4 metres per annum. However, total rainfall varies across Scotland as a consequence of the changing elevation gradient from West to East. In Western Scotland, where many rainfall systems arrive from the Atlantic Ocean, annual rainfall in the upland West
17 In the Köppen climate classification, Scotland as a Western European country experiences a temperate, oceanic climate (cfb)
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Highlands can be in excess of 3 metres per annum, while the flatter and more densely populated East Coast can be markedly drier, with around 0.6 metres of rain per annum (Figure 3). As a result, water distribution is distinctly uneven, and many areas experience a small margin between supply and demand. In addition, there is limited infrastructure to move water from the west (where the majority of the resource is located) to the east (where there is highest demand for the resource) (Scottish Water, 2015). Scotland’s overall rainfall has increased since the 1970s, with current volumes around 13% higher than the average values observed during the early 20th century (The Scottish Government, 2014). Furthermore, increasing temperatures during the winter months have resulted in reductions of low altitude snow cover in Scotland (Trivedi et al., 2007), with precipitation falling as rainfall rather than as snow. During the winter and spring, increased temperatures have resulted in both reduced snow accumulation and accelerated rates of snowmelt, resulting in soil moisture deficits into the later spring months when agricultural activities intensify. Warmer temperatures combined with drier summer conditions will result in enhanced rates of evapotranspiration, resulting in water resource deficits occurring during the summer and autumn months (Brown et al., 2012).
Scotland’s economic water usage is somewhat atypical compared to other developed countries in that agriculture and energy manufacturing have relatively low water-footprints. In Scotland, most agricultural crops are rain-fed, with irrigation being limited to the East to support potato farming. In the energy sector, the Scottish Government’s ambitions to reduce carbon emissions and expand the use of renewable technologies have also had significant consequences for water use. The closure of Cockenzie and Longannet power stations as part of the shift toward renewable energy resources (onshore wind, offshore wind, hydro and wave, which provide 68% of total electricity demand in Scotland) have significantly reduced the volumes of water used in electricity generation in Scotland (Allan et al., forthcoming). The decommissioning of nuclear facilities at Hunterston in Ayrshire (2024), and Torness in East Lothian (2030) will further reduce water intensity in the energy sector.
The abundance of freshwater in Scotland has resulted in a number of economic opportunities for Scotland, with many of our emblematic industrial sectors and brands reliant on freshwater as a critical input. One such emerging and increasingly successful sector is the craft gin industry, of which 70% of UK production is located in Scotland and is worth £1.76 billion to the UK economy (BBC, 2017). The emblematic whisky industry is worth an estimated £4.4 billion to the
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UK economy, contributing to around 3% of all UK trade. It is also a significant user of water, with each distillery across Scotland using water from streams, lochs, groundwater or piped supply for production and cooling processes. The UK Waste Resources & Action Programme (2011) estimates that the whisky industry uses around 61 billion litres of water per annum, 75-85% of which is used in the cooling process (representing water that is not “consumed”, but returned to the environment under strict quality regulations). This means for every 1 litre of whisky produced, 46.9 litres are used in production and cooling processes.
Figure 4: Rainfall map of the United Kingdom (1980-2010 average) in millimetres.
Source: United Kingdom Met Office
.
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As a water-intensive product, whisky production is especially vulnerable to periods of dry weather conditions. In 2008, several weeks of dry conditions resulted in production at five major distilleries in Islay being stopped due to water scarcity on the island (Kelbie, 2008). Similarly, dry conditions earlier in 2018 resulted in production being stopped at half of Islay’s ten distilleries. Additionally, the Blair Atholl and Edradour distilleries in Perthshire had to stop production as water flows in the Allt Dour burn dropped to insufficient levels (The Courier, 2018)
Disruption to production is not restricted to changing water availability; dry weather and drought conditions also impact on the growth of crops crucial in the whisky process including barley and maize. The “footprint” of whisky extends globally through its use of imported (non-water) ingredients. For example, some grain used in whisky production originates from outwith the United Kingdom, and so shocks across the supply chain in other parts of Europe can impact on production here in Scotland. While increased temperatures have demonstrably lead to increasing barley yields in parts of the United Kingdom (Yawson et al., 2016), reductions in soil moisture and reduced recharge of groundwater conditions present significant challenges to distilleries across the country. The water intensity of the whisky production process is a major focus for enhanced sustainability within the industry, and both the Scottish Environmental Protection Agency (SEPA) and Scotch Whisky Association (SWA) are committed to improving the water efficiency of distilleries by 10% by 2020 (Scottish Environmental Protection Agency, 2018).
Climate change induced future water-stress will challenge water-intensive economic sectors, either directly (as domestic water resources are impacted) or indirectly (via the impacts of water- stress in regions from where inputs are sourced via global supply chains). The atypical prolonged dry weather that Scotland experienced in the summer of 2018 had a demonstrable impact on the rural economy with soil moisture deficits and limited irrigation capacity hindering crop yields and impacting farm gate prices for crops and livestock (Scottish Government, 2018). Spring barley was particularly badly affected, with yields anticipated to be 10% lower than in previous years, with overall cereal yields forecast to be 6% lower than in 2017, an estimated loss of production of c. 2.6 million tonnes (Scottish Government, 2018). Such conditions are likely to become increasingly familiar in Scotland, with hotter and drier summer conditions, increased heatwaves and drought events, and an increase in the frequency and magnitude of
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extreme precipitation events being projected by UKCP18’s future climate scenarios (UK Met Office, 2018).
The increasing frequency and magnitude of extreme hydrological events (e.g., drought, pluvial flooding and fluvial flooding) present a significant risk of economic damage to land, property and critical infrastructure. As water scarcity during the summer months becomes increasingly prevalent, there will be a need for end-users and water utility providers to ensure a preparedness for spatial and temporal disparity in water resource availability. For some industries, these projected changes present very real challenges that will disrupt economic output. Natural irrigation via precipitation may significantly diminish and there may be a need for agroindustry to utilise larger volumes of water to irrigate critical crops and provide drinking water for livestock. The whisky industry will increasingly be at risk from the dry summer conditions, with a growing number of distilleries being impacted by water shortages. Finally, the growth in seasonal tourism may place a significant strain on service industries at a time of the year when water availability is at greatest risk.
Global water scarcity is uneven, with certain regions being particularly adversely impacted by future changes in water availability. Water as a resource is too heavy to ship internationally as a manner of addressing this scarcity. In order to reduce the impacts of water scarcity, the mobilisation of labour, economic productivity and international trade away from water-stressed regions to water abundant areas are viable solutions (Debaere, 2014). This would permit water- scarce nations to focus on the most economically profitable activities and import water- intensive products from more water-rich regions when continued production becomes increasingly difficult as water becomes less readily available.
As a result, while there are potential major consequences of climate change for the Scottish economy, current water abundance suggests that there may be economic opportunities with careful management and sustainable practices around our current water resources. The Scottish Government’s drive toward carbon reductions and a focus on renewable energy technologies have secured some of our water resources for alternative uses that support other aspects of economic activity. In addition to pioneering green policies, the increase in renewable energy generation represents an opportunity for increased renewable energy exports to the rest of the UK. As the climate of Scotland becomes warmer, there is scope for the expansion of agricultural
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production into new crops that may currently be primarily imported from much warmer regions. An awareness of the impending changes to our water resources also presents an opportunity for Scotland to pioneer behaviours that would futureproof our water resource infrastructure, upgrading many of the inefficient and dated systems that supply water to end-users to be resilient to future climate change. Finally, water provides Scotland with a comparative advantage to attract new industries that are intensive water users, and are perhaps geographically located within water-stressed areas where the availability or cost of water can restrict particular activities. A 2007 report from WaterWise (a UK NGO aiming to reduce water consumption) highlighted the water intensity associated with some critical manufacturing industries: the production of a single computer microchip can use 32 litres of water, whilst the manufacture of a car can use up to 400,000 litres of water (Zygmunt, 2007). Scotland already has a number of successful technology firms, with the sector concentrated in Edinburgh, Glasgow and Dundee contributing c.£2.8 billion GVA in 2017 (Tech Nation, 2018). The ability to attract water-intensive manufacturing industries (both traditional and advanced) to Scotland presents a significant opportunity to expand the technology sector in Scotland and provide opportunities to create an expanded, highly-skilled workforce across these areas.
IV Preparing for a water-scarce future: next steps
Climate change is already having a profound global impact, and national governments are increasingly taking action to reduce the impacts of changes on critical freshwater resources. To tackle this, and “future-proof” our socioeconomic reliance upon Scotland’s apparently abundant water resources, there is a pressing need to better understand our relationship with water, and identify key ways we can improve efficiency. This final section assesses the role of policy, technology and behavioural change can have to help socioeconomic actors better prepare for a water-scarce future.
Policy
A major focus for the development of a water-resilient society is the creation and implementation of policies at both the government and institutional levels (including environmental regulators, utility companies and private businesses) that seek to reduce unnecessary losses through inefficient use of water or leakage. Maximising the benefits presented to Scotland from water resources is a key aspect of the Hydro Nation strategy, established by the Scottish Government
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in 2012. The policy promotes sustainable practices across the economy to lower water intensities, builds pioneering water research and knowledge-building amongst Scottish institutions around water-centric themes, and provides funding for initiatives and facilities that can improve Scotland’s domestic water landscape. As the sole water provider in Scotland, Scottish Water loses c. 500 megalitres per day (Ml/d) from its distribution network; this represents around a third of its total water resource. Identifying and managing leakage from the network is a key strategy for Scottish Water and a critical part of its infrastructure repair policy. A key part of Scotland’s resource preservation strategy has been the development of the Scottish Environmental Protection Agency’s One Planet Prosperity regulatory strategy, that seeks to both help Scottish businesses reduce their water, carbon and material resource consumption and limit their pollution and waste generation (Scottish Environmental Protection Agency, 2016). Indeed, a critical part of most company strategies is the reduction of emissions, material consumption and water consumption (particularly in water-intensive industries, such as the whisky manufacturing sector).
Floodwater often results in devastating economic losses through damage to property and infrastructure, and there is a significant need to consider the expansion of existing floodplain planning legislation to account for increasing climate change impacts on fluvial flood magnitudes and frequencies.
Non-water policies can also impact significantly on the consumption of water resources. For example, as part of achieving their Climate Change (Scotland) Act 2009, the Scottish Government has already taken significant steps to preparing Scotland for a water-scarce future, by moving toward ambitious renewable technology goals that has resulted in “drying” the energy sector. Systematically replacing water-intensive fossil fuel and nuclear energy power plants with renewable technologies such as onshore and offshore wind turbines, wave and hydropower energy has achieved significant water reductions, as well as carbon emissions (Allan et al., forthcoming).
Technology
Reducing the water that is used unnecessarily in domestic and non-domestic activities is critical to conserving overall water resource for future uses, and technological innovation is integral to achieving this. Simple adaptations such as low-flush toilets and sensor-based low-flow taps
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reduce water use volumes both at home and in workplace and leisure settings, and both are increasingly replacing traditional bathroom fittings (particularly in new developments). Furthermore, certain industries are investing in new technologies that reduce water consumption in traditional, water-intense activities. For example, laundry services have increasingly adopted low (or zero) water washing machines that rely on polymer-based systems, something that could significantly reduce the water consumption associated with critical economic sectors such as hotels and accommodation, restaurants and industrial cleaning.
The development of environmental sensor technology is vital to future-proofing our future water resources. While space and airborne earth observation (e.g. remote sensing satellites, radar, LiDAR) technologies can provide oversight of our natural resources at a world region and national scale, increasingly “individual” technologies can help to monitor and reduce water waste at a household, or site-level. The increasing deployment of “smart” water meters, which enable the monitoring of water distribution and consumption efficiency have been successful in reducing water consumption in households. For water utility companies, the development of a smart grid network of meters connected to the Internet of Things (IoT) enables real-time monitoring of consumption, facilitating easier billing of customers and faster identification of leaks and hot spots for water waste. However, the overall uptake of smart water metering in the UK has been slow, in spite of the growing evidence of savings that such devices can achieve. This highlights that technology alone is an insufficient strategy to reducing water use, and that a focus on behaviour change is necessary. Paradoxically, water efficiency and savings strategies can result in an increase in consumption, where reductions in water costs via more efficient technologies can result in a rebound effect as users end up using more water in new areas. This has been reported in agriculture where more efficient irrigation technology has resulted in the expansion of cropped areas, ultimately resulting in an increase in overall water usage (Sears et al., 2018).
The development and installation of leakage detection systems are powerful strategies for water operators in maintaining efficient systems that supply entire towns and cities. Technological advances have reduced costs, enabled widespread deployment and “live” monitoring, and increasingly resulted in “non-destructive” technologies that can remotely detect failures without disrupting operations and necessitating large-scale disruption in digging up mains supply pipes (Liu & Kleiner, 2013). These types of technologies and applications are particularly important in
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older urban areas – such as in Scotland - where water and drainage infrastructure are often centuries old and not designed to sustain contemporary demand patterns or rainfall dynamics.
With markedly wet winter months that often result in persistent rainfall and consequent flooding, there is scope to explore using permeable areas of land for intentional flooding, allowing groundwater recharge and subsurface storage of water (i.e., “groundwater banking”, which is common practice in places like California), ensuring that floodwater can be viewed as a resource, rather than an economic cost.
Finding ways to reuse wastewater (‘grey water’) is increasingly a focus for water utility, local authority and national governments (e.g., toilets at the Scottish Parliament use greywater harvested from the building’s roof). Wastewater is a sustainable freshwater resource, and treatment and reuse is increasingly being applied across a number of industries and increasingly, to meet domestic demand. In Turkey, pressures on finite resources from climate change, urbanisation and population growth have already placed a significant stress on renewable freshwater resources, and Maryam and Büyükgüngör, (2017) highlight that by 2025, expected demand will be 183% of current consumption. Wastewater recycling is an option for many countries (particularly where scarcity and looming demand growth is an immediate reality), but existing treatment infrastructure and – crucially - public acceptance are often insufficient to justify the significant overheads associated with creating recycled potable water.
Behaviour change
Technological options only represent one part of the challenge to meet future water demand. Two key issues remain: a “true(r)” valuation of our water resources and facilitating large-scale consumer behaviour change. Valuation of water is a long-standing challenge for water resource managers and utility companies, and necessitates robust monitoring of water resources to identify where, how much, how efficiently water is being used. From the consumer’s perspective, smart meters can facilitate behaviour change and reduce bills. For example, a natural field experiment in Sydney, Australia highlighted a c.7% reduction in water consumption amongst smart meter households (Davies et al., 2014).
Garrick et al., (2017) outline a number of challenges for valuing water resources “appropriately”, i.e. in a way that encompasses contrasting socioeconomic, environmental and cultural values
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attached to water. In Scotland, water charges are included as part of domestic Council Tax bills along with wastewater services and there is often a perception that water in Scotland is “free” (as well as plentiful). This free water dialogue dominated recent consultations around the provision of drinking water from business premises across the United Kingdom (Keep Britain Tidy & Centre for Social Innovation, 2017). The abundance of water in Scotland, combined with the lack of separate water and wastewater billing services (unlike in the rest of the United Kingdom) can result in complacency around how we value and use our water resources, though the attitude of water as a “free economic good” is widely held across the UK. A YouGov survey in 2014 highlighted that 33% of respondents in the UK admit to leaving the tap running while brushing their teeth, while the figure in Scotland is significantly higher at 47%. In contrast, in California, advertisement campaigns and school programmes during the 1980s that continually reinforced the message of unsustainable freshwater household practices, including turning off taps whilst brushing teeth, has resulted in the practice almost disappearing, while it remains alarmingly common in Scotland.
Implementing behavioural change is a complex area, yet recent policies in the UK have transformed some day-to-day activities. Perhaps the biggest success story is the introduction of the 5p charge for plastic carrier bags introduced by most supermarkets and retail outlets. This has resulted in a significant reduction (80% in Scotland) in the use of disposable plastic bags since its introduction in 2014. Similarly, the coffee chain Starbucks recently introduced a coffee cup levy of 5p per disposable cup, introduced after a trial period in its London stores resulted in a 126% increase in the number of customers using reusable cups (Starbucks, 2018). Price elasticities associated with water tariffs have a demonstrable impact on overall rates of water consumption (Veck & Bill, 2000). Increases in water tariffs are often viewed as socially unjust (hitting poorer households hardest) and with questionable effectiveness, as international results have demonstrated that a 10% increase in the price of water will result in a 1-1.8% reduction in water consumption (Brick et al., 2017). By contrast, using “green nudges” in the form of social norm18 messaging that informs users of their consumption of a resource compared to others in their neighbourhood, results in an increasing awareness and lowering of
18 Social norm messaging provides users with an overview of their own consumption of a particular resource, often via a smart meter system or SMS messaging system, providing a comparison to the average use within their neighbourhood, driving pro-social and cooperative behaviour, particularly when positive behaviour is socially recognised (Brick et al., 2017). Economic Commentary, December 2018 68
consumption (Brick et al., 2017), and evidence from the United States has shown a 4.8% reduction in overall water consumption (Ferraro & Price, 2011). Using price signals to nudge consumer behaviour may have some impact in altering perceptions about water and its value in society, however the use of environmental nudges may also have significant impacts without potentially increasing the cost to low-income consumers. Indeed, emphasising the benefits of water-conservation to a population that views water as a bountiful resource represents a unique challenge, but one that may enhance sustainability over time and preserve our most critical of resources for future generations.
V Conclusions
The growing pressures on freshwater resources presents a significant challenge to water utility companies, national governments and river catchment managers. As climate change alters the volume and spatial regularity of water availability, an increased demand from households and non-domestic users presents a perfect storm not just for water resources, but also energy and food security. Water is the most critical natural resource in economic activities, and sensible management is needed both locally and globally to reduce the vast transfers of embedded water between countries and ensure local water security is maintained, particularly in water-scarce regions. Scotland’s wet, maritime climate and abundant water resources places it in a uniquely secure position to prepare for future changes in water resource availability. As a result, economic opportunities will emerge for Scotland, yet as the summer months of 2018 demonstrated, negative economic consequences still feature when water resources are impacted by climatic shortfalls in typical water availability. It is imperative that utility managers, policy makers and end-users of water take steps to protect these resources against future environmental change. This challenge requires a combination of robust climate and water policies from national and regional governance and the adoption of new technology to better monitor water supply and demand. However, there is also a challenge for end-users; to modify their own behaviour around water consumption, particularly in regions like Scotland where water is evidently abundant currently. Behaviour change represents a key challenge for Scotland, especially as water is too often undervalued or taken for granted by users who have rarely encountered scarcity during their lifetime. Changes in price tariffs can positively influence consumption of resources such as water, but research also demonstrates that social norm
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nudges can also positively influence consumptive behaviour. This combination of policy- technology-behaviour change presents an opportunity to ensure that Scotland has a secure water-future, but also one that yields economic opportunities for new industries and supply chains accordingly and sets Scotland up as an example of a water-rich nation with progressive policies that seek to both utilise and conserve our water resources.
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Corresponding author details:
Scott J. McGrane Research Fellow, Fraser of Allander Institute Department of Economics, Strathclyde Business School University of Strathclyde 199 Cathedral Street, Glasgow G4 0QU
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The emergence and evolution of City Deals in Scotland
David Waite, Duncan Maclennan, Graeme Roy, Des McNulty
Abstract
There is a resurgent policy emphasis on the role of city-regions as drivers of economic growth. Officials and leaders in such metropolitan areas, however, are confronted with challenges relating to administrative fragmentation, achieving alignment with national policy objectives, and demonstrating the capabilities to plan, finance and deliver effective policy interventions and investments. As a response to these challenges, policymakers are fashioning new governance arrangements, attached to experimental policy mechanisms, to develop urban policy. Of note, City Deals have recently emerged in the UK, and this paper charts their evolution across the UK, with a focus on the devolved administrations in particular. The paper ends with some reflections and questions about their roll out in Scotland.
Acknowledgements
The authors are members of or provide research support for the Glasgow Economic Commission, which is linked to, but independent of, the Glasgow City-region City Deal. This paper reflects the views of the authors only, writing in their academic capacities, and not the views of the Commission or any other body.
I The UK context
Changing institutional arrangements have been a persistent feature of the urban policy landscape in the UK, as the challenge of addressing uneven economic performance across and within UK city-regions remains (Centre for Cities, 2015; Tyler et al., 2017; McCann, 2016). It is clear that there has been both churn over time in the tools, strategies and approaches set out to address this issue (Jones, 2010; Pike et al., 2015) as well as marked contrasts between England and the now devolved administrations of the UK (Maclennan et al., 2017). A reasoned growth- role for infrastructure projects and programmes has seldom been at the core of national policies for cities, and the fitful nature of infrastructure planning and provision, coupled with questions about prioritisation approaches, reflect long standing policy challenges (NAO, 2016a). However, infrastructure investment, city-region growth and devolution are converging as key policy interests within UK City Deals.
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City Deals reflect a novel policy response to issues of sub-national economic development and hinge on the notion that local leaders are in the best position to determine interventions for their areas. Since 2012 – and across two waves, starting with the major cities outside of London – urban areas in England have been signing deals with the UK Government to secure funding packages to support economic growth (Ward, 2017; O’Brien and Pike, 2018). City Deals which are set out across periods up to 30 years, cover a suite of policy areas – including infrastructure investment, business support, employment and welfare interventions (Centre for Cities, 2014) – and have been developed alongside the dismantling of the prior architecture for sub-national economic development in England (the Regional Development Agencies (RDAs))19. City Deals cut across political differences to some degree, as numerous Labour-led localities in England have now agreed deals with the Conservative-led government in Westminster (Jenkins, 2015).
City Deals, unlike more traditional urban and regional initiatives in the UK, have a distinctive one by one form where localities form agreements with the UK government (and, in some instances, a devolved administration). Proponents see progress on localism through such an incremental approach - where powers and capacities are decentralised in modest steps - as a major attribute. Though evidence for the link between devolution and economic growth is unclear (Pike et al., 2012), the arguments for localism in the UK have gained ground as the impact of central policy orchestration and control on uneven development has been seen to be limited (Travers, 2015; McCann, 2016). Deal-making, in this context, represents a pragmatic stance given the different starting points of localities to take on further responsibilities. It is logical, some have suggested, that cities at the vanguard with demonstrable capacities and competencies should take what opportunities there are to agree decentralising arrangements (Cox et al., 2014). The UK is highly centralised in terms of where revenue and spending powers reside, therefore it is claimed, localities need to exploit the openings for greater local policy design and influence (Harrison, 2015).
The piecemeal nature of the deal-making approach raises interesting questions, however, regarding the nature of policymaking processes; both across the policy system (that spurs deal- making) and within individual deals. Indeed, reflecting an opportunity to firm up the clarity and guidance provided to localities negotiating a deal, some have recommended that an independent body should be formed to set out a clear path for localities to follow (RSA, 2015;
19 There were eight RDAs in England prior to 2012 (plus the London Development Agency), covering geographies in England such as the North West and East Midlands.
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Pike et al., 2016; Blond and Morrin, 2015; Ayres et al., 2016). The UK Government has recently committed to developing a “devolution framework” which may provide some response to this issue (Jeffrey, 2018). At an individual deal-making level, furthermore, others have questioned the manner by which deals are struck, and, more particularly, the nature and extent of citizen and community participation (Prosser et al., 2018).
A series of principles underpin the roll out of City Deals. First, City Deals hinge on a rejection of “one-size-fits-all” policymaking (HM Government, 2016a). The economies of Newcastle and Bristol, for example, differ in terms of the pressures and opportunities they confront, and thus policies need to be tailored to local contexts. Additional housing may be the capital investment priority in one city, whilst in another, a new rail link to open up access to employment sites may be the primary concern. Though individual deals vary in how bespoke they appear - with central government seen to strongly determine the shape and nature of deal development (O’Brien and Pike, 2018; Pike et al., 2016) - one can point to a number of examples, such as proposals for an oil and gas innovation centre in Aberdeen (a city highly dependent on the natural resources sector) that reflect context-sensitive responses (HM Government, 2016b). In our view, the aim to develop bespoke agreements – giving some scope for innovation in policy design - is arguably the strongest feature of the City Deal approach (Cheshire et al., 2014).
Second, robust local governance is central to deal-making, as the UK Government seeks to ensure localities have sufficient structures in place to manage the obligations and risks. A number of City Deals, for example, present an incentivising logic by inserting a payment-by- results mechanism. This requires localities to demonstrate progress on growth objectives at fixed intervals (“gateway” periods) in order to release further capital funding within an infrastructure fund (HM Government, 2014). Forms of governance vary across the deals – depending on the nature and magnitude of the deals at stake, as well as enabling legislation – yet common themes can be identified. In this respect, a requirement for mayors in England has emerged based on more recent devolution deals. Drawing on in-vogue urban public management perspectives (Barber, 2013) - but with their efficacy disputed by others (Pike, 2017) - the impulse for mayors has yet to spread to Scotland or Wales. Additionally, business interests are often closely coupled to governance arrangements, whether formally secured through local enterprise partnership (LEP) associations in England, or new organisations (e.g. Cardiff; HM Government, 2016d) or “regional enterprise councils” (e.g. Edinburgh; City of Edinburgh Council, 2018) being formed in the devolved nation contexts.
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Third, devising policy at functional economic geographies reflects a key technical consideration for deal-makers. Central to this idea is that urban policy needs to be shaped to respond to the dominant flows that make up urban systems, notably commuting and transport patterns. For cities such as Glasgow and Manchester, where the central local authority area significantly under-bounds its commuting geography, it is seen to be problematic that urban policy and investment strategies focus solely on the administrative area. In this way, City Deals have given some support to an emergent city-regionalism in the UK (with local authorities working together, and, for follow-on deals in England, mayoral combined authorities being formed) (Beel et al., 2016). Some, however, point to the clamour to cut a deal overriding the coherent demarcation of functional economic geographies (e.g. the North of Tyne devolution deal that excludes Gateshead (Tomaney, 2018)).
Alongside City Deal mechanisms, moreover, there are policy themes linked to the UK’s sub- national economic development challenges. Most prominently, spatial rebalancing – and the still widening gap between London and the south-east, and the rest of the UK - is a key focus for the UK Government (Martin et al., 2016). Indeed, processes of industrial restructuring and the clustering of high-growth sectors in the south-east of England present questions, now long- running, about how the economic bases in the rest of the UK can be rejuvenated. Whilst the north-south divide is not explicitly mentioned in City Deal documentation, think-tanks have framed the issue as central to urban policy (Centre for Cities, 2015). Related to this are debates in England about inequalities in infrastructure spending (Overman, 2014; IPPR North, 2017) and the advantages London is seen to enjoy (McCann, 2016). The Northern Powerhouse which broadly seeks to improve linkages across major urban centres in the north of England (Overman et al., 2009), can be seen as a political response to the spatial divide in economic outcomes (MacKinnon, forthcoming). The “Powerhouse” agenda was influenced by the RSA City Growth Commission (2014) and a UK Government strategy has recently been released to give it impetus (HM Government, 2016c). Though clarity is emerging in some respects, others have questioned whether the policy reflects more brand than strategy, and whether aspects of funding are re- packaged rather than new (Lee, 2017; MacKinnon, forthcoming). This new push for pan-Northern co-operation in England (Parr, 2017) – which has yet to spur comparator initiatives in the devolved administrations20 - sits at a cross-regional level going beyond individual, typically city- region focused deals.
20 There have been initial discussions about a “western powerhouse” linking Cardiff to Bristol.
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Table 1 – City Deals and the wider evolution of deal-based policymaking in the UK 2011 2012 2013 2014 2015 2016 2017 2018 City Deals Proposal for City Wave 1 – 8 English Wave 2 begins Wave 2 – agreements Cardiff Swansea Stirling; Tay Cities (incl. head of Deals introduced in Core Cities for a further 18 Inverness Edinburgh (Discussions in terms) “Unlocking growth in English cities Aberdeen progress for Belfast cities” and Derry City) Glasgow Growth Deals First Growth Deals Announcement of Further funding in Negotiations for (Ayrshire (giving funding for expansion to deals Budget and then North Wales and commitment; Moray LEPs in England) Autumn Statement Scottish Borderlands negotiation; Mid- (in the Autumn Wales discussions) statement) Devolution Deals Devolution Deal for Devolution deals for Devolution deals for Five updates/ North of Tyne Greater Manchester Sheffield; North East; East Anglia; Greater iterations to the Tees Valley; Lincolnshire; and Greater Manchester West Midlands; and West of England devolution Liverpool City Region arrangement by 2017. Second Devolution deal for devolution deal for Cornwall the West Midlands.
Mayoral Held in May for Sheffield City Region elections Greater Manchester; (held in May) Liverpool City Region; Cambridgeshire / Peterborough; West Midlands; West of England; Tees Valley Legislation Localism Act Cities and Local Government Devolution Act Major Scottish Government Welsh Government – RSA City Growth UK Government - UK Government - Local industrial strategies/ – Agenda for Cities Haywood task and Commission (noting Northern Powerhouse Industrial Strategy strategies being advocacy finish group report on “powerhouses") Strategy white paper prepared in England positions city-regions (references City Scottish Government Deals; notes – updated Agenda for Transforming Cities Cities Fund for transport in England) Sources: Ward (2017): Sandford (2017); NAO (2015; 2016b); Gray et al. (2018); authors’ own elaboration
III City Deals in the devolved administrations
Starting with the Glasgow City Deal agreed in the summer of 2014, City Deals have gradually been rolling out across the devolved administrations and are now the preferred mechanisms, it would appear, for supporting sub-national economic development (Table 2 sets out the features of the Scottish deals to date). Writing in this publication previously, the cities policy advocate Greg Clark has suggested that “[city leaders] need to be empowered”, and that, in the Scottish context, City Deals “could have an important impact in increasing urban productivity” (Clark et al., 2016: 7). Coupled with the apparent enthusiasm for deal-making in the Scottish and devolved administration contexts – with deals contributing to what some have described as a “cluttered” economic policy context (Fraser of Allander Institute, 2018: 4) - new political dynamics have emerged.
Deals in Scotland and Wales present a tripartite politics whereby the UK government, the devolved administration and the relevant set of local authorities (for the particular city-region) are bound into negotiation and eventual commitments. Here, local alongside national devolution claims emerge. The former leader of Cardiff Council argued, for example, for greater support and autonomy from the Welsh Government – arguing that Councils have been “held back” and need to “receive a sufficient level of funding and be given the powers [needed] …” (Bale cited in Silk, 2016). Meanwhile the Secretary of State for Scotland (representing the UK Government) has argued, in criticising the Scottish Government:
“There is a revolution going on in local government across the rest of the United Kingdom, with local areas regaining power and responsibility at an unprecedented rate. Scotland cannot afford to be left behind … There is now real risk that Glasgow, Edinburgh, Aberdeen, Dundee, and indeed the towns and counties of Scotland as a whole, will be left behind – stuck in a 1990s time-warp of centralised, Holyrood-dominance.” (BBC, 2015)
The Scottish Government’s commitment to further deals across Scotland – indeed coverage across the country is sought (Scottish Government, 2018) – coupled, perhaps, with wider localist developments through the Community Empowerment (Scotland) Act and the ongoing Local Governance Review, may provide alternative perspectives. Of course, debates over funding commitments, through the deal-making negotiations, bring the competing claims on deal-making commitments into sharp relief. The apparently differential UK Government and
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Scottish Government commitments for the Tay Cities reflects this (see table 2))(Buchan, 2018); additionally, the Scottish Government point out their £254 million contribution over and above the £125 million match commitment to the Aberdeen deal (Scottish Government, 2016).
A further political consideration is the potential for conflicting, or incommensurable, policy agendas to interface within a deal. In Wales, for example, the Welsh Government’s commitment to well-being - given the Well-being of Future Generations (Wales) Act - presents emphases not shared in the same way by the UK Government, where deals are framed as economic growth drivers principally (Waite and Bristow, 2018). As the Welsh Assembly committee into City Deals observed in its final report:
“… there is a clear tension between the GDP-focus of City Deals, and the Welsh Government’s broader definitions of prosperity, and wider aspirations set out in the Well-being and Future Generations legislation. While all partners in both the Cardiff City Region and Swansea Bay claim that both can be achieved, it is not 100% clear at this stage whether or how that will be done” (National Assembly for Wales Economy, Infrastructure and Skills Committee, 2017: 19).
A similar position is presented in Scotland given apparent commitments by the Scottish
Government to “inclusive growth”21, which the Enterprise and Skills review links to City Deals expressly (Scottish Government, 2017: 8). Indeed, testimony to a Scottish Parliament committee enquiry highlights the tension between UK and Scottish government positions (Scottish Parliament Local Government and Communities Committee, 2018: 20).
Politics in a horizontal form is also evident across different regions and localities within a nation. As in England, deal-making has privileged, at least initially, major cities (with cities seen as “engines of growth” (HM Government, 2011)). However, such an approach is meeting resistance from those outwith metropolitan areas. Falkirk Council (2017), in their submission to the Scottish Parliament committee on city-region deals, pointed to the “need to avoid an over- emphasis on the role of cities” while the submission from the Ayrshire Growth Deal (2017) notes the need for non-city-region areas to receive the “same level of attention”. These perspectives, in intimating a city-centrism in policymaking, raise questions of consistency and coherence in spatial policy within the devolved administrations (and it is interesting to observe Fife’s position within two City Deals agreed (Edinburgh and Tay Cities)).
21 http://www.inclusivegrowth.scot/about-us/ [retrieved 3/12/2018]
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Underlying such political and strategic concerns, at an operational level, a Scottish City-region deal delivery board - which is jointly convened by the Scottish and UK Governments - seeks to: provide guidance on business case development, monitor implementation, and agree “as far as possible, common negotiating positions” for new deals.22 With respect to the latter, it will be interesting to track how and whether this body aligns with, or is steered by, the UK Government’s “devolution framework” which is due to be released in late-2018. Moreover, with “regional economic partnerships” emerging from the Scottish Government’s Enterprise and Skills review (2017), their alignment with new governance arrangements for City Deals may reflect key institutional developments for urban and regional policy.
22 https://www.gov.scot/groups/scottish-city-region-deal-delivery-board/ [retrieved 3/12/2018]
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Table 2 – Overview of City Deals in Scotland
City core Glasgow (1) Inverness (2) Aberdeen (3) Edinburgh (4) Stirling (5) Perth and Dundee (6) Name of deal Glasgow City-region City Deal Inverness and Highland City- Aberdeen City Region Deal Edinburgh and South East Stirling & Clackmannanshire Tay Cities Region Deal region Deal Scotland City Region Deal City Region Deal Local Glasgow City, Inverclyde, East Highland Aberdeen City, Edinburgh, East Lothian, Stirling and Dundee, Angus, Fife and Perth and authority Dunbartonshire, West Aberdeenshire Fife, Midlothian, Scottish Clackmannanshire Kinross partners Dunbartonshire, East Borders, West Lothian Renfrewshire, Renfrewshire, North Lanarkshire, South Lanarkshire
Funding £1.13 billion investment fund – “… the Scottish Government “Over the next 10 years, £300 million each from the £45.1 million each from the £150 million each from the Scottish (maximum £500 million each from the UK will commit up to £135 both Governments are Scottish and UK UK and Scottish and UK governments (over 10-15 amounts) and Scottish governments, plus million. The United Kingdom committed to jointly governments. Additionally governments (UK years). £130 million from local Government will commit up to investing up to £250 “regional partners will government capital Discussion of a further £50 million authorities. 20 year period. £53 million and the Highland million. Aberdeen City contribute up to a maximum contributions will spread from the Scottish Government; and Council and regional partners Council and Aberdeenshire of £730m” over a 15 year over 15 years). “Regional calls for a like additional have committed up to £127 Council and regional timeline. partners will match this commitment from the UK million over 10 years”. partners are committed to investment with up to Government. investing up to £44 million.” £123.8 million”. Notable Infrastructure projects Northern Innovation Hub; Oli and Gas Technology Data driven innovation (DDI) International Environment Skills and Employability initiatives including: Canal and North Science Skills Academy; Centre; innovation hubs for research; Integrated Centre; Aquaculture Hub; Development Programme support; (some subject Gateway; Clyde Waterfront and assisted living; investment in the food and life sciences Regional Employability and international visitor centre; Tay biomedical cluster; to business Renfrew Riverside; Glasgow Inverness Castle for tourism; sectors; digital Skills (IRES) programme; digital hub; improved International Barley Hub; Advanced case airport investment area. In housing; West Link transport; infrastructure fund; A720 city bypass; IMPACT transport connections Plant Growth Centre; Cyber Security approval); not innovation, the City Deal “land expansion of Aberdeen centre. between Stirling and Alloa. Centre of Excellence; Forensic an exhaustive supports MediCity and an remediation to the east of the harbour. Science Research Centre; advanced list Imaging Centre of Excellence. A9/A82 Longman junction”. plastic reprocessing facility. Sources: (1) HM Government (2014), http://www.glasgowcityregion.co.uk/article/7626/Projects; (2) HM Government (2017), https://www.gov.scot/policies/cities-regions/city-region-deals/; (3) HM Government (2016b); (4) City of Edinburgh Council (2018); (5) HM Government (2018b); (6) HM Government (2018c); Buchan (2018).
IV Future considerations
City Deals across the UK are now beginning to attract international interest and application. In Australia, City Deals have emerged through the Federal Government’s Smart Cities Plan (Australian Government, 2016). Broadly following the UK model, City Deals in Australia have been struck for Townsville (Queensland), Launceston (Tasmania), Darwin (Northern Territory) and Western Sydney (NSW); and plans are underway for Geelong23 (Department of Prime Minister and Cabinet, 2017)). In the Netherlands, stemming from the Dutch Urban Agenda, City Deals reflect thematic policy areas agreed by a number of cities. As exemplified with eight cities signing the “circular economy” City Deal (Circular Economy, 2016), “co-operation within and between urban areas” [italicised for emphasis] (Agenda Stad, 2015) marks a distinct difference with the UK variant. Such Dutch deals reflect: “agreements between public and/or private parties to help cities and urban regions address problems and achieve their ambitions … Cities and other stakeholders determine the form the City Deals take, with central government acting as partner and facilitator” (Government of the Netherlands, 2015). Elsewhere support for City Deals has come from the former head of the US-based Brookings Metropolitan Policy Program. Katz (2014) – who previously pointed to the greater potential for metro-led economic development policy given apparent policy stagnation at the federal level (Katz and Bradley, 2013) - remarks that deals would be usefully considered in the US context:
“… the United States should consider adopting some of the specific vehicles by which the U.K. is devolving power. Central government in Britain is in the process of negotiating a series of “city deals” with eight major metro areas that will grant specific powers and funding to local actors. Manchester provides a shining example of what is possible when a national government places itself in the service of the natural economic geography, the metropolis.”
Such international examples illustrate the appeal of the deal-making approach to urban policymakers (courtesy of the promotional work of policy transfer agents (Burton, 2016)). Where tripartite arrangements are in place - such as in Australia - useful opportunities for learning and cross-national communities of practice may emerge (formalised dialogue with officials involved in Welsh deals may also warrant consideration).
23 https://www.premier.vic.gov.au/geelong-city-deal-on-the-move-with-key-players-outlining-the-path-forward/ [retrieved 3/12/2018]
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City Deals in Scotland also exhibit interesting evolutions as reflected in the varying content of the deals agreed. The Glasgow City Deal - the first deal in any of the devolved administrations - is comprised largely of an infrastructure fund of 20 projects spread across seven local authority areas.24 Transport, land remediation, site assembly and amenity improvements are dominant features within the fund. In contrast, the deal for Edinburgh - which was agreed in full in mid- 2018 - places much greater emphasis on innovation activities connected to universities (with the universities engaged at an early point).25 This raises some interesting questions: do the variations in emphasis across the two deals reflect the differences between the economic structures and bases of the cities, and thus effectively prioritise the interventions that will spur growth? Do the different tools and approaches taken to model the urban economies have a bearing? Indeed, whilst Glasgow’s infrastructure fund hinged on project prioritisation based on the use of a land use transport integration model26, Edinburgh’s deal was informed by the use of a labour market model (Maclennan, 2015). It is intriguing to consider the dimensions of the urban economy that each approach privileges and how that may shape the projects incorporated within City Deals. Additionally, the data-driven innovation initiative which features strongly in the Edinburgh City Deal, follows from a UK Government/BEIS-led Science and Innovation Audit which emphasised the potential of such economic functions (BEIS, 2016). In summary, some consideration of how deal-making cities have arrived at project prioritisation – through technical tools, local economic knowledge bases and partnership formation – may be useful to highlight, and this may reflect, to some degree, the evolution of deal-making as a learning by doing process.
Questions also exist about how new policy initiatives, such as the UK Government’s Industrial Strategy, may shape or compel future deal-making. If bidding for funding to higher orders of government is the form through which regional and urban policy is destined to take, cities in Scotland will need to learn to play the game (indeed, will we see local industrial strategies emerge in the devolved administrations? (HM Government, 2018a: 3)). Whilst recognising the Scottish Government’s desire for complete spatial coverage, policymakers in some of Scotland’s city-regions already with a City Deal – looking at major city-regions in England that boast multiple growth and devolution deals, covering wider investment and service delivery areas –
24 http://www.glasgowcityregion.co.uk/article/7626/Projects [retrieved 3/12/2018] 25 http://www.acceleratinggrowth.org.uk/about-us/ [retrieved 3/12/2018] 26 www.glasgow.gov.uk/Councillorsandcommittees/viewSelectedDocument.asp?c=P62AFQDNT1DXZ3810G [retrieved 3/12/2018]
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might understandably question what deal should come next. Indeed, the idea of a follow up deal has been proposed for Aberdeen (Hebditch, 2018). This reflects deal-making as an iterative process that may further deepen asymmetric policy arrangements.
In summary, City Deals contain a number of useful policy innovations and may present a useful channel to consider where policy levers and responsibilities should be located (deal-making as a process not as a “one-off” event (HM Government, 2016)). Questions can nevertheless be raised as to whether this piecemeal approach to policymaking is sustainable in the long run with consequent spatial divides in terms of funding allocations and outcomes likely (Pike et al., 2016: O’Brien and Pike, 2018). Furthermore, the context of Brexit and ongoing local authority budget constraints present challenges for achieving outcomes – beyond the control of local authorities - for even the most well prioritised and implemented deal. At the individual city-level, two additional questions exist: one, will City Deals be able to withstand political change?; two, can we distinguish between the direct economic growth effects attributable to City Deals from longer-term institution and capacity building possibly brought about by deal-making? In terms of the latter, in other words, is it the economic impacts of the deal itself, or, in the long run, the new ways of working that deal-making may bring about that will prove to be most critical?
Author Details David Waite Research Fellow, Policy Scotland and Urban Studies School of Social and Political Sciences University of Glasgow Room 403, Adam Smith Building Glasgow G12 8RS [email protected]
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