Deputy First Minister outlines priorities for sustainable growth
Fair work and more efficient public services will be at the heart of Scotland’s economy, Deputy First Minister Shona Robison pledged today.
Plans to deliver real benefits to the people of Scotland through a strong, green economy, underpinned by the most progressive tax system in the UK, are outlined in the Scottish Government’s Portfolio Prospectus which pledges firm actions to be achieved by 2026.
These include:
creating the UK’s most progressive tax system to deliver public services, tackle poverty and grow the wellbeing economy
increasing the number of workers earning at least the real living wage, while narrowing the gender pay gap
making Scotland a leading European start-up nation, in which more businesses are created and grow to scale
growing international exports while diversifying into new markets
laying foundations to produce 5 Gigawatts (GW) of hydrogen production by 2030, as part of a Scottish hydrogen supply chain
implementing a New Deal for Local Government, including a fiscal framework, to tackle collective challenges and improve outcomes
The Deputy First Minister was joined by Wellbeing Economy Secretary Neil Gray on a visit to Dear Green Coffee Roasters in Glasgow – a company based on fair work principles and sustainability which embodies the vision for a wellbeing economy.
Ms Robison said: “The Scottish Government’s Policy Prospectus lays out the practical measures we will take to transform the economy, deepen our relationship with business and maximise the value of our public spending.
“Developing a wellbeing economy is not just good social practice, it makes sound economic sense. By focusing on strong public services, we can help disabled people, the long-term sick and those with caring responsibilities to get back into work. While paying a fair wage, and reducing the gender pay gap, can produce a committed workforce which in turn will help increase productivity and improve staff retention.
“We will work in partnership with local government to update the way it is financed and improve collaboration. Underpinning this will be stable, sustainable public finances delivering people-focused public services and supporting Scotland’s net-zero goals.
“Our resources will be focused where they can have the maximum impact, such as laying the foundations of a hydrogen supply chain and supporting internationally competitive green technologies, health and life sciences and advanced manufacturing.”
The Scottish Government’s Policy Prospectus is based on three missions: equality, opportunity and community.
Hiring activity across Scotland falls again in March
Permanent placements fall for second month running
Further marked drop in supply of permanent labour
Pay pressures moderate but remain strong overall
The latest data from the Royal Bank of Scotland Report on Jobs survey signalled a fall in permanent staff placements across Scotland for the second consecutive month in March.
The reduction was fuelled by ongoing economic uncertainty, which resulted in increased hesitancy among companies to commit to new hires. Additionally, temp billings fell for the sixth month running.
In terms of labour supply, there was a further sharp fall in the number of candidates for permanent vacancies, while temp staff availability fell at the weakest pace in the current 25-month period of contraction. At the same time, growth of demand for permanent staff moderated in March, with vacancies rising at the slowest pace in just over two years.
Furthermore, demand for temp workers contracted for the third consecutive month. In terms of pay, pressures on starting salaries and wages remained marked, partly due to the cost-of-living crisis, but also competition for workers amid ongoing labour shortages.
Downturn in permanent staff hires softens from February
Permanent placements across Scotland fell for the fifth time in the past six months in March. According to recruiters, the latest downturn was largely driven by economic uncertainty and hesitancy to commit to new hires.
While the rate of contraction across Scotland moderated notably from February, it was stronger than that recorded for the UK as a whole.
A sixth straight monthly decline in temp billings was reported across Scotland in March. That said, the respective seasonally adjusted index picked up from February’s 32-month low, indicating the softest decrease in billings since December last year.
However, at the UK level, temp billings continued to increase and at the quickest pace since September 2022.
Marked contraction in permanent staff supply
A further drop in permanent labour supply was recorded across Scotland in March, thereby stretching the current run of contraction to 26 months. The pace of decrease was broadly similar to that seen in February and stronger than the series average. According to anecdotal evidence, fewer permanent candidates were available partly due to economic uncertainty and the subsequent reduction in active job seekers.
In contrast, the UK as a whole recorded the first rise in permanent labour availability in over two years, albeit one that was mild overall.
March data revealed a fractional drop in temp staff availability across Scotland. Notably, the pace of contraction moderated further from December last year and was the weakest seen in the current 25-month sequence of reduction. A preference for permanent positions and hesitancy to switch roles reportedly weighed on availability. However, fewer work opportunities and the completion of projects helped to improve short-term labour supply in some areas.
Meanwhile, the availability of candidates for temporary vacancies at the UK level increased for the first time in 25 months.
Growth in starting salaries moderates, but remains rapid
Salaries for new permanent hires rose rapidly across Scotland in March. Competition for skilled staff, the cost-of-living crisis and labour shortages were said to have driven up salaries. While the rate of inflation was stronger than the historical and UK-wide averages, the pace of growth was the softest seen in 23 months.
March data pointed to a sharp rise in hourly wages for temporary workers across Scotland, thereby extending the current run of growth to 28 months. While the pace of temp wage inflation intensified from February, the upturn was among the weakest in the aforementioned sequence, and broadly in line with the historical average.
The pace of wage growth across the UK as a whole was quicker than that seen for Scotland.
Softer upturn in demand for permanent staff
Permanent job openings grew solidly across Scotland in March. However, the latest upturn was the softest seen for just over two years and weaker than that at the UK-wide level.
Of the eight monitored sectors, Nursing/Medical/Care saw the strongest upturn in permanent staff demand, with IT & Computing ranking second.
Demand for temporary workers across Scotland fell for the third month running in March. The rate of contraction was marked overall, and contrasted with a modest increase in temp vacancies across the UK as a whole.
The steepest drop in temp staff demand was seen for Blue Collar roles, followed by Executive & Professional.
Sebastian Burnside, Chief Economist at Royal Bank of Scotland, commented: “March data revealed a further decline in hiring activity across Scotland, as ongoing economic uncertainty weighed on firms’ appetite for new staff.
“Moreover, with growth in permanent vacancies weakening further, and temp vacancies falling for the third month running, it appears unlikely that recruitment trends will improve much in the coming months. Nevertheless, despite the slowdown in hiring, pay pressures remained acute.
“This was in part fuelled by the cost-of-living crisis, but also increased competition for scarce candidates.”
Report identifies 31 ways to reduce gender gap and boost economy
The Scottish Government will carefully consider proposals to support more women into entrepreneurship, First Minister Nicola Sturgeon has said following publication of a wide-ranging independent review.
Pathways: A New Approach for Women in Entrepreneurship was commissioned by the Scottish Government to identify ways to unlock untapped potential, close the gender gap and boost Scotland’s economy.
The review – led by Ana Stewart, an entrepreneur and investor, and co-authored with Mark Logan, chief entrepreneur to the Scottish Government – makes 31 recommendations. The steps include:
providing start-up training and support in a range of pop-up locations to help more women, and other primary care givers, access services
integrating entrepreneurial education into schools and further education
clarifying existing access pathways into entrepreneurship
improving access to start-up and growth finance
tracking and measuring progress towards full representation in entrepreneurship
Commenting on the report, First Minister Nicola Sturgeon said: “I welcome Ana Stewart and Mark Logan’s work in delivering a powerful review of the barriers facing women in entrepreneurship in Scotland and presenting a compelling set of recommendations aimed at removing them.
“The review’s findings are challenging but underline the need to tackle the root-causes, as well as the immediate barriers, of this inequality.
“Fully realising the entrepreneurial potential of women in Scotland will not only promote greater equality in our society, it will also deliver significant benefits for the economy.
“The Scottish Government will respond quickly to the review as a whole, and its recommendations.”
Review chair Ana Stewart said: “This review has, through a combination of extensive stakeholder engagement and robust data analysis, revealed that women face many significant barriers to entrepreneurship.
“Only one in five businesses in Scotland are female-led, while start-ups founded by women received only 2% of overall investment capital in the last five years. By taking a root cause and effect approach, our recommendations focus on dramatically increasing female participation rates to drive a vibrant and fairer entrepreneurial economy.”
The First Minister welcomed the publication of the review on a visit to Roslin Innovation Centre, where she met Ishani Malhotra, Chief Executive of Carcinotech, and Dr Kate Cameron, who founded Cytochroma.
Private sector activity falls at a quickened pace in January
Downturn in new orders extends to seventh month
Marked drop in service sector new business
The Scottish private sector reported a further fall in total activity during January according to the latest Royal Bank of Scotland PMI® data.
The Business Activity Index – a measure of combined manufacturing and service sector output – fell from December’s five-month high of 48.3 to 47.1, signalling a quickened contraction in private sector output, and extended the current run of contraction to six consecutive months.
The rising cost of living, supply chain disruptions and a slowdown in the housing market all contributed towards the latest downturn in activity.
At the sector level, January data revealed that service firms led the decline, registering faster rates of reduction in both business activity and new orders compared to their manufacturing counterparts.
New business received across the Scottish private sector posted a further contraction in January. Moreover, the pace of decrease quickened from December’s three month low, signalling a sharp reduction in new work.
The downturn was led by a faster fall in new business received at service providers, while goods producers reported the softest decline in eight months. A slow housing market, transport strikes and squeezed disposable incomes were all in part blamed for the drop in new orders.
Of the 12 monitored UK regions, Scotland registered the sharpest pace of contraction in incoming new business.
After weakening for the second month running, business expectations across Scotland improved during January and printed a six-month high. Optimism largely stemmed from anticipation of new projects and increased activity. That said, the latest reading continued to post below the survey average as worries over the war in Ukraine, energy crisis, slowdown in the real estate sector and the cost-of-living crisis weighed on growth expectations.
Additionally, business sentiment across Scotland registered the third-weakest in the UK, ahead of Northern Ireland and the North East of England.
For the second month running, workforce numbers contracted across the Scottish private sector in January. The rate of job shedding was modest overall and only fractionally quicker than that seen in December. Where a drop in employment was noted, firms cited resignations, redundancies and retirements.
The drop in workforce numbers across Scotland contrasted with the no change seen at the UK-level.
The levels of unfinished work fell during January across Scotland’s private sector, thereby extending the current trend seen since last June. Moreover, the respective seasonally adjusted index ticked down from December’s four-month high, signalling the fastest rate of depletion in the aforementioned sequence. According to anecdotal evidence, lower orders allowed firms to work through previous contracts.
The rate of backlog depletion across Scotland was the fastest of all the 12 monitored UK regions.
Firms across Scotland’s private sector recorded a sharp rise in prices during January, thereby stretching the current run of inflation to 32 months. While the rate of incline measured the softest since May 2021, the latest upturn was still marked and historically elevated. According to anecdotal evidence, the incline in input costs was linked to higher prices for raw material, energy and transport, inflation and higher wages.
The pace of input price inflation across Scotland was the second-softest among the UK regions, behind the North West of England.
Private sector firms across Scotland raised their charges for goods and services for the twenty-seventh month running in January. Though the pace of charge inflation slowed to a three-month low, it remained stronger in context of survey data. The rise in charges reflected increasing cost pressures.
Adjusted for seasonality, the Prices Charged Index for Scotland posted below the UK-wide figure.
Source: Royal Bank of Scotland, S&P Global
Judith Cruickshank, Chair, Scotland Board, Royal Bank of Scotland, commented: “The start of the year revealed that the downturn in Scottish private sector activity that began last August was extended into 2023.
“Moreover, the latest decline in private sector activity accelerated. It seems unlikely that the sector will bounce back anytime soon as services firms were severely impacted by the depressed demand conditions and the current economic climate.
“The step back in client activity has also resulted in firms trimming their workforce numbers for the second month running. Alongside an ongoing drop in the level of unfinished work, a further reduction in payroll numbers can be expected.
“However, the latest figures indicate that perhaps the worst of inflation has passed. Nonetheless, the current rates of input price and output charge inflation are still elevated and can be detrimental to the health of the Scottish private sector.”
“There is no economy without nature” warns Dr Jeremy Leggett, ex Greenpeace Chief Scientific Advisor
Insurance companies, pension and investment funds are still financing fossil fuels – but urgently need to back nature recovery
The Green Finance Institute estimates that the UK is facing a finance gap of up to £97 billion to meet the UK’s nature-related targets by 2032. Without investment in climate mitigation, biodiversity restoration, flood prevention and other nature-related outcomes as outlined in public policy like the 25 Year Environment Plan, both our natural environment and economy face collapse.
Highlighting the urgent need for investment in nature, in the week that climate action group One Home reported that £600 million worth of homes are at risk of falling into the sea, Jeremy Leggett called on the UK’s financial sector to “step up or get washed away”.
Leggett, a former Chief Scientific Advisor to Greenpeace and founder of Solarcentury, one of the world’s most respected solar energy companies, is an experienced entrepreneur, who backed solar technology long before the government and financial institutions. Decades later, having proved his point with solar providing the cheapest energy available, he is now urging the financial sector to wake up to the facts and invest in the protection of nature.
“By continuing to invest in fossil fuels and related industries which destroy nature, institutional investors and many large funds are financing their own demise. There will be no business in a broken world. If big business does not invest in biodiversity and natural capital now, there will be no business.
He continued: “While the recent donation from Aviva of £38 million to the Wildlife Trust is a welcome development, donations are not a sustainable model for financing nature recover. Highlands Rewilding, and related projects, offer a new model for investment in nature-based solutions, with multiple revenue streams providing an economic and ecological return on investment.”
Having grown Solarcentury from a small South-London roofing company to a major international business deploying gigawatts of solar PV around the world, Leggett sold Solarcentury to Statkraft, which is owned by the Norwegian Ministry of Trade. But, rather than retire, Leggett invested his share of the proceeds – and raised more than £7 million – to start Highlands Rewilding, which currently owns two estates in Scotland.
“What we are doing here is opening up a pathway for businesses to finance nature recovery,” explains Leggett. “Humanity is at a tipping point which can go either way. Either we invest in the restoration of the natural environment, or we risk the complete collapse of civilization as we know it – including the economy.”
For the last few months Highlands Rewilding has been running a crowdfunding campaign, which has exceeded its initial target and raised over £700,000 from more than 400 individuals.
“Hundreds of citizens are helping to finance the vital nature recovery we so desperately need. But so far it is almost exclusively individuals who have stepped up to invest”, says Leggett.
“Government announcements, like the UK’s Ambitious roadmap for a cleaner, greener country, have pledged public money but the effort to halt biodiversity loss will need the backing of major investment funds, who are still sitting on the fence. The evidence is clear; Nature needs our help. But the major financial institutions are ignoring the warnings – and the opportunities.
“We saw it happen with renewables. Major finance was too slow to see the scale of the opportunity and too slow to come on board. Thankfully that situation changed but it took too long and we are living with the consequences. The situation is now even more urgent. Big business needs to back natural capital or the erosion of the economy will follow the same fate as the Norfolk coastline.”
Leggett is not alone in his assertions. Andy Howard, Global Head of Sustainable Investment points out that over half of global GDP, $44 trillion, is dependent on nature and its services, commenting: “The reality is stark: nature risk is fast becoming an integral factor to investment risk and returns”.
Dame Glenys Stacey, the chair of the government’s own Office for Environmental Protection commented that wildlife in particular was suffering “eye-watering” declines. “Species decline stands out – the rate of decline is inexorable,” she said. “This needs a lot of intervention, that is absolutely required.”
With the Treasury already stretched to its limits and further tax rises not compatible with the cost-of-living crisis it seems hard to imagine the government will be able to address the urgent funding gap at the required speed, or scale, to halt and reverse species decline. The only hope therefore is private sector finance and commercial capital.
In Scotland, Highlands Rewilding is performing a litmus test, entering the final quarter of its race to raise the required funds to scale nature recovery in Scotland. Their investment round is one of the first efforts after COP 15’s landmark biodiversity agreement, to break through the barrier of institutional finance.
Thank you for that welcome, thank you all for joining us at Bloomberg.
From the way we communicate and collaborate, to the way we buy and sell goods and services, digital technology has transformed nearly every aspect of our economic lives.
How do I know that?
Because I too, just like Matt asked ChatGPT to craft the opening lines of this speech.
Who needs politicians when you have AI?
Like other countries, the UK has been dealing with economic headwinds caused by a decade of black swan events: a financial crisis, a pandemic and then an international energy crisis.
And my party understands better than others the importance of low taxes in creating incentives and fostering the animal spirits that spur economic growth.
But another Conservative insight is that risk taking by individuals and businesses can only happen when governments provide economic and financial stability.
So the best tax cut right now is a cut in inflation.
And the plan I set out in the Autumn Statement tackles that root cause of instability in the British economy.
The Prime Minister talked about halving inflation as one of his five key priorities and doing so is the only sustainable way to restore industrial harmony.
But today I want to talk about his second priority, to grow the economy. (In case you weren’t sure, I have them on the screen behind me.)
We want to be one of the most prosperous countries in Europe and today I’m going to outline the 4 pillars of our plan to get there.
Just as our plan to halve inflation requires patience and discipline, so too will our plan for prosperity and growth.
But it’s also going to need something else which is in rather short supply – Optimism, but we can get there.
Just this month columnists from both left and the right have talked about an “existential crisis,” “Britain teetering on the edge” and that “all we can hope for…is that things don’t get worse.”
I welcome the debate – but Chancellors, too, are allowed their say.
And I say simply this: declinism about Britain is just wrong.
It has always been wrong in the past – and it is wrong today.
Some of the gloom is based on statistics that do not reflect the whole picture.
Like every G7 country, our growth was slower in the years after the financial crisis than before it.
But since 2010, the UK has grown faster than France, Japan and Italy. Not at the bottom, but right in the middle of the pack.
Since the Brexit referendum, we have grown at about the same rate as Germany.
Yes we have not yet returned to pre-pandemic employment or output levels.,
But an economy that contracted 20% in a pandemic still has nearly the lowest unemployment for half a century.
And while our public sector continues to recover more slowly than we would like from the pandemic – strengthening the case for reform – our private sector has grown 7.5% in the last year.
Yes inflation has risen – but is still lower than in 14 EU countries, with interest rates rising more slowly than in the US or Canada.
And yes we have to improve our productivity. But output per hour worked is higher than pre-pandemic.
And last week a survey of business leaders by PWC said the UK was the third-most attractive country for CEOs expanding their businesses.
Economists and journalists know you can spend a long time arguing the toss on statistics,
But the strongest grounds for optimism comes not from debating this or that way of analysing data points but from our long term prospects: because when it comes to the innovation industries that will shape and define this century the UK is powerfully positioned to play a leading role.
Let’s just look at some of them.
In digital technology, as we heard from Michelle, we have become only the third economy in the world with a trillion-dollar sector.
We have created more unicorns than France and Germany combined with eight UK cities now home to two or more unicorns.
The London / Oxford / Cambridge triangle has the largest number of tech businesses in the world outside San Francisco and New York.
PWC say that UK GDP will be up to 10% higher in 2030 because of AI alone. Fintech attracted more funding last year than anywhere in the world outside the US.
Or life sciences, where we have the largest sector in Europe. And a brilliant advocate with our superb Science Minister George Freeman.
We produced one of the world’s first Covid vaccines, estimated to have saved more than 6 million lives worldwide.
We identified the treatment most widely used to save lives in hospitals, saving more than a million lives across the globe.
We are behind only the US and China in terms of high-quality life science papers published, and every one of the world’s top 25 biopharmaceutical firms has operations in the UK.
Another big growth area is our green and clean energy sector.
The UK is a world leader here, with the largest offshore wind farm in the world. Last year we were able to generate an incredible 40% of our electricity from renewables. But on one day, a rather windy December 30th, we actually got 60% of our electricity from renewables – mainly wind.
McKinsey estimate that the global market opportunity for UK green industries could be worth more than £1 trillion between now and 2030.
And we are proceeding with the new plant at Sizewell C, led by our excellent Business Secretary who also spoke very wisely and surprisingly classically earlier on.
I could also talk about our creative industries which employ over two million people and grew at twice the rate of the UK economy in the last decade.
They have made the UK the world’s largest exporter of unscripted TV formats and help give us a top three spot in the Portland Soft Power index.
Or our advanced manufacturing sector, key to exports, where we produce around half of the world’s large civil aircraft wings and its biggest aeroengines as well as around half of the world’s Formula One Grand Prix cars.
The golden thread running through the industries where the Britain does best is innovation.
Amongst the world’s largest economies, the Global Innovation Index ranks us fourth globally.
Those innovation industries now account for around a quarter of our output. They have been responsible for nearly all our productivity growth since 1997.
And they’re also the reason that all of you are here.
In the audience we have leaders from Meta, Microsoft, Amazon, Apple and Google, the world’s largest tech companies all with major operations in the UK.
We have Monzo and Revolut, shining examples from our world-beating fintech sector.
And we have founders and CEOs from some of our most exciting UK technology companies, like Proximie and Matillion.
You are all vital for Britain’s economic future, but Britain is vital for your future too.
So I want to ask all of you to help our country achieve something that is both ambitious and strategic.
I want you to ask you to help turn the UK into the world’s next Silicon Valley.
What do I mean by that?
If anyone is thinking of starting or investing in an innovation or technology-centred business, I want them to do it here [in the UK].
I want the world’s tech entrepreneurs, life science innovators, and green tech companies to come to the UK because it offers the best possible place to make their visions happen.
And if you do, we will put at your service not just British ingenuity – but British universities to fuel your innovation, Britain’s financial sector to fund it and a British government that will back you to the hilt.
Our universities are ranked second globally for their quality and include three of the world’s top ten.
In order to support the ground-breaking work they do in so many new fields the government has protected our £20 billion research budget, now at the highest level in history.
And as you look for funding to expand, we offer one of the world’s top two financial hubs and the world’s largest net exporter of financial services.
The capability of the City of London combined with the research strengths of our universities makes our aspiration to be a technology superpower not just ambitious but achievable – and today I am here to say the government is determined to make it happen.
But like any business embracing new opportunities, we should also be straight about our weaknesses.
Structural issues like poor productivity, skills gaps, low business investment and the over-concentration of wealth in the South-East have led to uneven and lower growth. Real incomes have not risen by as much as they could as a result.
Confidence in the future though, starts with honesty about the present.
We want to be one of the most prosperous countries in Europe, so today I set out our plan to address those issues.
That plan, our plan for growth, is necessitated, energised and made possible by Brexit.
The desire to move to a high wage, high skill economy is one shared on all sides of that debate.
And we need to make Brexit a catalyst for the bold choices that we’ll take advantage of the nimbleness and flexibilities that it makes possible.
This is a plan for growth and not a series of measures or announcements, which will have to wait for budgets and autumn statements in the years ahead.
But this plan is a framework against which individual policies will be assessed and taken forward.
I set out that plan, those priorities under four pillars. They build on the “People, Capital, Ideas” themes set out by the Prime Minister last year in his Mais Lecture and as such are the pillars essential for any modern, innovation-led economy.
For ease of memory the 4 pillars all happen to start with the letter ‘E’ . The Four ‘E’s of economic growth and prosperity. And they are Enterprise, Education, Employment and Everywhere.
So let’s start with the first ‘E’ which is enterprise. If we are to be Europe’s most prosperous economy, we need to have quite simply, its most dynamic and productive companies.
There is a wide range of literature citing the importance of entrepreneurship on business dynamism, whereby more productive firms enter and grow and less productive firms shrink.
But I don’t just believe the theory, I have put it into practice.
I set up and ran my own business for 14 years. It was one of the best decisions I ever made – and I actually owe it to Margaret Thatcher and Nigel Lawson.
Because by the time I got to university and was thinking about my career options, they had changed attitudes towards entrepreneurship. Had they not, I would have probably ended up in the City or the Civil Service.
Instead I took a different route to end up at the Treasury – less the Fast Stream, more the Long Way Round.
Like thousands of others setting up on their own, I learned to take calculated risks, live with uncertainty and work through failures (of which there were many).
Every big business was a start-up once – and we will not build the world’s next Silicon Valley unless we nurture battalions of dynamic new challenger businesses.
Today, we are already ranked by the World Bank as the best place to do business amongst large European nations and second only to America in the G7.
And the result of that pro-business climate is that since 2010 we have created more than a million new businesses in this country.
But the question I want to ask is how are we going to generate the next million?
Firstly, we need lower taxes. In Britain, even after recent tax rises, we have one of the lowest levels of business tax as a proportion of GDP amongst major countries.
But we should be explicit: high taxes directly affect the incentives which determine decisions by entrepreneurs, investors or larger companies about whether to pursue their ambitions in Britain.
With volatile markets and high inflation, sound money must come first.
But our ambition should be to have nothing less than the most competitive tax regime of any major country.
That means restraint on spending – and in case anyone is in any doubt about who will actually deliver that restraint to make a lower tax economy possible, I gently point out that in the three weeks since Labour promised no big government chequebook they have made £45 billion of unfunded spending commitments.
But it isn’t just about lower taxes. We also need a more positive attitude to risk taking.
Let’s start with one of the most public risks taken this year. Richard Branson, his team and the UK Space Agency deserve massive credit for getting LauncherOne off the ground in Cornwall.
The mission may not have succeeded this time, but what we learn from it will make future success more likely.
We should heed the words of Thomas Edison who said: “I have not failed 10,000 times – I’ve successfully found 10,000 ways that will not work.”
Edison was American – and our attitude to risk in this country can still be too cautious compared to our US friends.
But we are capable of smart risking in this country: at the start of the pandemic we bought over 350 million doses of vaccine without knowing if they would actually work – and ended up with one of the fastest and most effective vaccine programmes in the world.
We also need, if we are going to deliver those competitive enterprises, smarter regulation.
Brexit is an opportunity not just to change regulations but also to work with our experienced, effective and independent regulators to create an economic environment which is more innovation friendly and more growth focused.
Our Chief Scientific Adviser, Sir Patrick Vallance, is currently reviewing how the UK can better regulate emerging technologies in high growth sectors and the government is identifying where to reform the laws we inherited from the EU.
In the digital space Patrick is working with the brilliant , Matt Clifford – who we heard from earlier- and our amazing Culture Secretary Michelle Donelan, both of whom gave excellent speeches.
Before we conclude those findings, we want to hear from you. That why we’ve invited you this morning – and we will repeat the process for green industries, life sciences, creative industries and advanced manufacturing.
Finally when it comes to the ‘E’ of Enterprise there is a critical need for easier access to capital, particularly scale ups.
I am supporting important changes to the pensions regulatory charge cap and I have used the regulatory flexibility provided by Brexit to change the Solvency II regulations which will begin to be implemented in the coming months.
Alongside other measures announced in the Edinburgh reforms, this could unlock over one hundred billion pounds of additional investment into the UK’s most productive growth industries.
But there is much more to be done and I want to harness the ideas and the expertise in this room to turn the ‘E’ of enterprise into an enterprise culture built on low taxes, reward for risk, access to capital and smarter regulation.
The next ‘E’ is Education.
This is an area where we have made dramatic progress in recent years thanks to the work of successive Conservative education ministers.
The UK has risen nearly 10 places in the global school league tables for maths and reading since 2015 alone.
Our teachers and lecturers are some of the best in the world.
And as the Prime Minister has said, having a good education system is the best economic, moral, and social policy any country can have.
That is why the Autumn Statement we gave schools an extra £2.3 billion of funding and why the Prime Minister recently prioritised the teaching of maths until 18.
But there is much to improve. We don’t do nearly as well for the 50% of school leavers who do not go to university as we do for those who do.
We have around 9 million adults with low basic literacy or numeracy skills, over 100,000 people leaving school every year unable to reach the required standard in English and maths.
That matters.
We are becoming an adaptive economy in which people are likely to have to train for not one but several jobs in their working lives.
Not having basic skills in reading and maths makes that difficult, sometimes impossible.
And equally important is what happens beyond school.
We have made progress with T-levels, boot camps and apprenticeships and Sir Michael Barber is advising the government on further improvements to the implementation of our reform agenda and we want to ensure our young people have the skills they would get in Switzerland or Singapore.
If we want to reduce dependence on migration and become a high skill economy, the ‘E’ of education will be essential – and that means ensuring opportunity is as open to those who do not go to university as to those who do.
So, Silicon Valley enterprises; Finnish and Singaporean education and skills; let me now turn to the third ‘E’ which is Employment.
If companies cannot employ the staff they need, they cannot grow.
High employment levels have long been a strength of our economic model.
Since 2010, the UK has seen a record employment rate, the lowest unemployment rate in nearly fifty years and labour market participation at an all-time high.
Partly thanks to the coalition reforms of a decade ago we are at 76% ,employment levels higher than Canada, the US, France or Italy.
But the pandemic has exposed weaknesses in our model. Total employment is nearly 300,000 people lower than pre-pandemic with around one fifth of working-age adults economically inactive.
Excluding students that amounts to 6.6 million people – an enormous and shocking waste of talent and potential.
Of that 6.6 million people, around 1.4 million people want to work. But a further five million do not.
It is time for a fundamental programme of reforms to support people with long-term conditions or mental illness to overcome the barriers and prejudices that prevent them working.
We will never harness the full potential of our country unless we unlock it for each and every one of our citizens.
Nor will we fix our productivity puzzle unless everyone who can participate does.
So to those who retired early after the pandemic or haven’t found the right role after furlough, I say: ‘Britain needs you’ and we will look at the conditions necessary to make work worth your while.
That is why employment is such a vital third ‘E.’
Enterprise, Education and Employment – three key components for long term prosperity.
I conclude with my final ‘E’ – Everywhere. That means ensuring the benefits of economic development are felt not just in London and the South-East but across the whole of the UK.
It is socially divisive if young people feel the only way to make a decent living is to head south. But it is also economically damaging.
If our second cities were the productive powerhouses we see in the other major countries, our GDP would be nearly 5% higher – making us second only to the United States and Germany for GDP per head.
That is why levelling up matters. And why last week it was so exciting to see the progress being made.
Since February 2020, when the levelling up agenda really got underway ,70% of new employed jobs have been created outside of London and the South-East.
Thanks to our powerhouse regions we remain one of the top 10 manufacturers globally, and the same is starting to happen with new industries: whether fintech in Bristol, gaming in Dundee or clean energy in Teesside.
Every region has seen pay grow faster than London since 2010, which shows that our approach to regional growth is working.
But there is much more to do, and whilst government grants can play a galvanising role they are not the whole answer.
We also need the connectivity that comes from better infrastructure.
That is why in the Autumn Statement we protected key projects like HS2, East West Rail and core Northern Powerhouse Rail.
Digital connectivity matters as well. Under Michelle’s leadership, full-fibre broadband now available to more than 40% of all homes in the UK.
Last year four million more premises got access, with the biggest increases in Scotland and Northern Ireland.
But the ‘E’ of Everywhere has to be about local wealth creation as much as about local infrastructure.
So this year we will announce investment zones, mini-Canary Wharfs, supporting each one of our growth industries, and each one focused in high potential but underperforming areas, in line with our mission to level up.
They will be focused on our research strengths and executed in partnership with local government, with advantageous fiscal treatment to attract new investment.
We will shortly start a process to identify exactly where they will go.
But spreading opportunity everywhere needs local decision making alongside local infrastructure and local enterprise.
So we must also give civic entrepreneurs the ability to find and fund their own solutions without having to bang down a Whitehall door.
Shortly over 50% of the population of England will be covered by a devolution deal and two thirds covered by a unitary authority and that’s a very important part of that.
But we need to move more decisively towards fiscal devolution so that fantastic local leaders like Ben Houchen and Andy Street have the tools they need to deliver for their communities.
Four ‘E’s – Enterprise, Education, Employment and Everywhere – four ‘E’s to unlock our national potential to be one of Europe’s most exciting, most innovative and most prosperous economies.
Bill Gates is supposed to have said people overestimate what they can do in one year and underestimate what they can do in ten.
When it comes to the British economy, we are certainly not going to fall into that trap.
We will remember the essential foundation on which long term prosperity depends, namely the sounds money that comes from bringing down inflation. But right now, starts our longer-term journey into growth and prosperity.
World-beating enterprises to make Britain the world’s next Silicon Valley.
An education system where world-class skills sit alongside world-class degrees.
Employment opportunities that tap into the potential of every single person so businesses can build the motivated teams they need.
And as talent is spread everywhere, so we will make sure opportunities are as well.
Yes there are many structural challenges to address. And working our four pillars we will do just that. Never forgetting though the combination of bold ingenuity and quiet confidence that defines our national character.
Ladies and gentlemen, being a technology entrepreneur changed my life.
Being a technology superpower can change our country’s destiny.
New analysis by IFS researchers shows the stark funding challenges facing the Scottish Government, and the public services it is responsible for, over the next five years and beyond.
In the next two financial years, the budget for day-to-day non-benefit spending looks very tight:
After taking account of in-year funding top-ups this financial year, which under current plans will not be available in 2023–24, funding will fall by 1.6% in real terms in 2023–24 compared with this year. Even after adjusting for major one-off costs this year, such as council tax rebates, the reduction will still be 0.8%.
Official projections imply that funding will fall by a further 1.6% in real terms in 2024–25, and then grow only modestly over the next three years. This means that funding is set to be almost 2% lower in 2027–28 than in 2022–23.
Such cuts would imply difficult trade-offs for the Scottish Government. Increasing spending on health to meet rising costs and demand, and boosting spending on net zero policies could require cuts of around 13% to other public service spending between 2023 and 2027.
These are among the key findings of two pre-released chapters from the inaugural IFS Scottish Budget Report, focusing on the Scottish Government’s funding outlook and devolved income tax revenue performance. Other key findings include:
Medium-term outlook
The baseline projections above rely on Scottish Fiscal Commission (SFC) forecasts of a significant improvement in income tax revenues. This largely reflects faster expected growth in Scotland’s underlying income tax base relative to the rest of the UK, rather than the effects of tax rises announced in the Scottish Budget last month. If this faster growth doesn’t materialise, then the Scottish Government’s choices would be harder still, with funding for non-benefits spending in 2027–28 still 5% below 2022–23 levels.
The faster growth in Scotland’s tax base forecast for the next few years follows a period during which the tax base has grown more slowly than in the rest of the UK. Because of this, SFC forecasts imply that even by 2026–27, almost one-third of the yield from Scotland’s higher income tax rates will be offset by slower tax base growth since the devolution of income tax in 2016–17. This would still be a substantial improvement from this financial year though, for which the SFC estimates that revenues from Scotland’s income tax policy changes since devolution will be more than fully offset by slower underlying growth in the tax base.
Long-term outlook
While the Barnett formula used by the UK government to allocate funding is often thought to benefit Scotland, in the long term it is likely to lead to relatively smaller increases in funding for Scotland than for England. The speed of this ‘Barnett squeeze’ depends on the rate of growth in spending in England (both real-terms growth and that which merely offsets inflation), and the rate of population growth in Scotland relative to England.
Using long-term projections for inflation and GDP growth from the Office for Budget Responsibility, assuming public spending is held constant as a share of GDP, and taking into account population projections from the Office for National Statistics, we project Scottish Government funding per person would increase by an average of 1.2% per year in real terms over the 30 years between 2027–28 and 2057–58. This compares to an average of 1.4% in England over the same period. Under this scenario, spending per person in Scotland would fall from 124% of English levels in 2027–28, to 121% in 2032–33, and to 115% in 2057–58.
Faster real-terms spending growth in England to meet the rising costs of health and social care (which are expected to grow faster than GDP) would result in bigger absolute increases in funding for the Scottish Government, making it easier for it to meet these costs in Scotland. However, it would increase the Barnett squeeze on funding levels relative to England – making it harder for the Scottish Government to maintain enhanced levels of service provision over and above those in England.
Bee Boileau, a research economist at the IFS and an author of the report said: “Additional funding from the UK government and a forecast boost to devolved tax revenues mean the outlook for funding has improved a little since last May’s Resource Spending Review.
“But the picture is far from rosy. Official projections imply that funding for non-benefit spending is set to fall over the next two years and then grow only slowly over the following three years. Indeed, it would still be close to 2% below 2022–23 levels in 2027–28. And that assumes a significant improvement in the performance of Scotland’s devolved income tax revenues – without that, this funding would be close to 5% lower than this year in 2027–28.
If either of these scenarios were borne out, the Scottish Government would likely need to make significant cuts to a range of public services. Further big increases in devolved tax rates would be one way to avoid such cuts.
“The Scottish Government will instead be hoping for additional funding from the UK government – which may not be in vain as the UK government would also need to make cuts to many services if it sticks to the plans for spending it has pencilled in.’
David Phillips, an associate director at the IFS, and another author of the report said:‘The Scottish Government’s long-term funding outlook beyond 2027–28 will also be determined, to a large extent, by UK government spending decisions via the Barnett formula.
“This formula is often seen to benefit the Scottish Government, by providing it with a much higher level of funding per person than is available for comparable services in England.
But this is a misunderstanding of the nature of the formula and its purpose. Because it provides the Scottish Government with a population-based share of funding changes planned for England, and Scotland starts with a higher-than-population share of funding, it delivers a smaller percentage increase in funding for Scotland than England.
This so-called Barnett squeeze will make it more difficult for the Scottish Government to meet rising costs and the demands on public services associated with an ageing population, and to maintain enhanced service provision relative to England, such as free personal care and free university education, in the longer term.”
This week always feels like a bit of a transition every year – it starts to feel a bit late to say “Happy New Year”, and the start of the week is dubbed “Blue Monday” as people realise that those well-meaning new year resolutions have already been broken (writes Fraser of Allander Director MAIRI SPOWAGE).
One of mine was to think hard to find the optimistic news in what can sometimes feel like the unrelentingly negative economic situation we are in, which is likely to remain tricky throughout the year. I was tested hard this week as new inflation data was released on Wednesday.
Inflation falls to 10.5% – but let’s not get too excited
The ONS released the official inflation data for December, which showed CPI inflation had fallen from 10.7% in November to 10.5% in December.
The main items driving the fall in inflation are petrol and diesel prices, and prices for clothing in footwear. Prices at the pump have been falling since their peak in July, and in December they were back to roughly the levels they were at before the Russian invasion of Ukraine. Clothing and footwear has fallen really due to a lack of discounting in December 2021, so when compared to December 2022 it appears that prices have fallen.
Obviously, energy prices are still contributing hugely to this very high inflation rate (which, let’s not forget represents a 40 year high of inflation apart from the preceding three months in 2022). That increase is currently stable in the figures due to the UK Government’s Energy Price Guarantee – but this cap on unit prices is only in place until end March, when it increases to £3,000 for a household with typical use. The ONS estimate that this will add 1 percentage point to inflation when it comes into effect.
Worryingly for those on the lowest incomes, food prices continue to increase faster than the headline rate. The inflation rate for food and non-alcoholic beverages increased to 16.9% in December from 16.5% in November.
We were asked two main questions when the data came out on Wednesday.
The first was, of course – what is the outlook for inflation for the rest of 2023? The expectation by the OBR is that inflation is likely to fall to under 4% by the end of the year. But remember, this does not mean that prices will start to fall at this point – just that they will grow less quickly.
This is somewhat simply due to the definition of inflation – it compares prices now to prices a year earlier, so as we move into October, we will be comparing to the much higher energy costs from October 2022. It was therefore inevitable that growth was likely to slow down – a point to bear in mind when some try to take credit for the fall in inflation.
The second is whether we are likely to see further increases in the Bank of England’s base rate at their next meeting on 2nd February – especially given that inflation has come down a bit. Unfortunately for mortgage payers, it is still very likely that we will see further increases in the base rate.
Why? Because inflation is not just been driven by food and energy costs. CPI excluding energy, food, alcohol and tobacco (often referred to as core CPI) is at 6.3%, and has been around this level since July 2022. This is being generated by domestic factors, including the tight labour market, which means the Bank is likely to take the view that they need to continue to cool demand in the economy.
Scottish unemployment remains at 3.3%
We also got updated figures on the labour market on Tuesday, covering the three months to November. Scottish unemployment remained at 3.3%, slightly below the UK rate of 3.7%. Employment remains high, at 76.1%, with inactivity at 21.3%.
Changes in inactivity over the period of the pandemic have been a focus of much analysis – because although the level is now similar to before the pandemic, the underlying reasons why people are inactive seem to have changed – with an increasing number saying that they are not in work or seeking work because of ill health or disability.
See a great Twitter thread on this by our colleague Professor Stuart Mcintyre – as part of his monthly analysis of the labour market.
Alongside the headline labour market numbers, there is also information ONS publishes monthly on earnings and vacancies.
The vacancy level alongside the labour market data helps us understand how tight the labour market continues to be. The total number of vacancies has been falling in recent months, since the record highs in Q2 2022. However, the number of vacancies remains historically very high, with 1.0 unemployed people for each vacancy – a rate which remains indicative of a tight labour market.
Earnings (ex bonuses) grew by 6.4% in the year to the three-month period Sept-Nov. Given the inflation rate over this period, this means that earnings are continuing to fall in real terms. In the face of continuing public sector pay disputes across the UK, the split between the public and private sectors is particularly interesting. Private sector pay grew by 7.2% compared to 3.3% for the public sector.
Health Foundation publishes important research into health and health inequalities in Scotland
This week the Health Foundation published a report to provide a picture of health and health inequalities in Scotland, in order to inform future efforts to improve both.
An independent review underpins their report, and we were delighted to work with the Health Foundation on this programme of work, as one of four independent organisations to carry out supporting research. See our research here.
And finally, I don’t care if it’s too late – Happy New Year everyone! But that is the last time I’ll say it this year.
Private sector output falls for fifth month running
Contraction in new work remains solid
Employment falls for first time in 21 months
According to the latest Royal Bank of Scotland PMI® data, private sector activity fell solidly during December. The Business Activity Index – a measure of combined manufacturing and service sector output – improved from November’s recent low of 43.9 to 48.3 in December, signalling the softest downturn in activity in the current five-month sequence of reduction.
Similarly, while new work received fell strongly in December, the pace of decrease was softer than that recorded in the previous survey period. That said, the ongoing drop in business requirements amid challenging demand conditions resulted in the first fall in employment in 21 months. Moreover, as backlogs of work continued to decrease and expectations moderated further.
Demand shortfalls continued to lead a decrease in new work received across Scotland’s private sector in December, thereby extending the run of contraction to six successive months. While the rate of decline eased from November’s recent low, it was solid overall. The cost of living crisis, higher interest rates and growing economic uncertainty were all linked to the loss in client appetite.
Moreover, the downturn in incoming new business across Scotland was stronger than that recorded at the UK-level.
Sentiment across the Scottish private sector ticked down for the second month running during December. The latest reading was the second weakest in 31 months and comfortably below the historical average. The war in Ukraine, a slowdown in the housing market and inflation weighed heavily on confidence.
Of the 12 monitored regions, Scotland had the third-lowest Future Activity Index reading, ahead of Northern Ireland and the North East.
Latest data signalled a fall in employment across Scotland during December, thereby ending the run of uninterrupted growth that began in April 2021. This was driven by lower staffing levels reported at service providers, as goods producers posted another slight rise in headcounts. The overall decline was only marginal. Where a fall was noted, firms were either actively reducing headcounts or delayed hiring despite reports of resignations.
The pace of job shedding across Scotland was slightly faster than the UK average, which similarly reported a fall in payroll numbers for the first time in 22 months.
As has been the case since June, levels of unfinished work fell across Scotland during December. The rate of depletion eased on the month to the softest since August, but was solid overall. Surveyed businesses reported that as the pipeline of new work was eroded, they were able to work through backlogs.
The pace of contraction across Scotland was in line with that recorded for the UK as a whole.
Companies in Scotland registered another substantial incline in average cost burdens during December, thereby stretching the current run of inflation to 31 months. While the pace of incline was the softest in 18 months, it registered well above the pre-COVID average. An array of reasons was attributed to the latest incline, which included higher wages, inflation, the ongoing energy crisis and Brexit.
Price pressures, while elevated, were still weaker across Scotland than that seen across the UK as a whole.
Prices charged for the provision of goods and services rose for the twenty-sixth successive month during December. Scottish firms were keen to share cost burdens with clients. The pace of charge inflation eased from November to the softest in three months but was still among the highest on record.
Source: Royal Bank of Scotland, S&P Global.
Judith Cruickshank, Chair, Scotland Board, Royal Bank of Scotland, commented: “The Scottish private sector recorded another grim performance during December. Client appetite suffered as various economic headwinds continued to dominate the business environment. That said, the downturn across Scotland visibly eased from November, as both private sector output and new work received fell at softer paces.
“Moreover, the loss in demand helped to relieve price pressures, with slower rates of inflation seen for both input costs and output charges. Nonetheless, these remain well above their respective historical averages.
“As we move into 2023, it will be important as to how firms adjust to demand shortfalls. We have already noticed the first reduction in employment since March 2021. Moreover, amid a high inflation and interest rate environment, it will be difficult to revive demand and thus will be the primary concern for businesses.”
Bank of Scotland’s Business Barometer for December 2022 shows:
Business confidence in Scotland fell nine points during December to 15%
Scottish businesses identify top growth opportunities as evolving their offer (36%), investing in their teams (31%) and entering new markets (25%)
Overall UK business confidence rose seven points during the last month to 17%, with eight out of 11 nations and regions reporting a higher reading than November
Business confidence in Scotland fell nine points during December to 15%, according to the latest Business Barometer from Bank of Scotland Commercial Banking.
Companies in Scotland reported lower confidence in their own business prospects month-on-month, down five points at 25%. When taken alongside their optimism in the economy, down 10 points to 6% this gives a headline confidence reading of 15%.
Scottish businesses identified their top target areas for growth in the next six months as evolving their offer (36%), investing in their teams (31%) and entering new markets (25%).
The Business Barometer, which surveys 1,200 businesses monthly, provides early signals about UK economic trends both regionally and nationwide.
A net balance of 11% of businesses in the region expect to increase staff levels over the next year, up three points on last month.
Overall UK business confidence rose seven points during December to 17%. The proportion of businesses that felt positive about the wider economy was up 10 points month-on-month to 8%, while their outlook on their own future trading prospects increased by two points to 27%. Businesses also remained optimistic about job creation, with 16% of firms planning to hire more staff in the next 12 months – up two points on November.
All UK regions and nations reported a positive confidence reading in December, for the first time since July, with eight out of 11 recording a month-on-month increase in confidence. Of those, the North West (up 31 points to 40%), North East (up 24 points to 34%) and South East (up 23 points to 14%) saw the largest monthly increases, with the North West now the most optimistic overall.
Chris Lawrie, area director for Scotland at Bank of Scotland Commercial Banking, said: “Although business confidence has dipped it’s encouraging to see it remain in positive territory, which is testament to the resilience of the business community here in Scotland.
“After a turbulent few months many companies are now looking at shoring up their investment plans for the year ahead. Those planning to invest in their teams and export into new markets will do well to keep a close eye on cash flow to ensure they’re ready to capitalise on opportunities as they arise.”
The manufacturing sector reversed a six-month trend of falling confidence, with a nine-point rise to 13%. Confidence in construction and services also increased by nine points to 29% and 18% respectively. However, retail confidence fell slightly, by two points to 13%.
Paul Gordon, Managing Director for SME and Mid Corporates, Lloyds Bank Commercial Banking, said: “It’s encouraging to see the confidence of most regions and nations rallying as we end the year. This has been a tough time for businesses with rising costs and much uncertainty, but some firms are becoming more confident as we head in to 2023.
“While wage expectations start to temper, prices continue to rise and keeping a close watch on cash flow remains a priority for businesses, no matter what industry you operate in. For those who are in need of support or are looking for advice, especially into the festive season and new year, at Lloyds Bank we are by your side in times of uncertainty.”
Hann-Ju Ho, senior economist for Lloyds Bank Commercial Banking, said: “Business confidence has received a boost in the run up to Christmas as firms anticipate a better festive trading period than last year.
“While firms report being hopeful for a more successful 2023, inflation and the risk of an economic downturn remain the biggest concerns for businesses, with rising costs evidenced by the number of firms expecting to raise prices.
“Wage growth is expected to remain high for now as retaining existing staff and attracting new talent will continue to be priorities for many businesses going into next year.”
