Economic Recovery Implementation Plan: Scottish Government response to the Advisory Group on Economic Recovery

1. Economic Context

1. Our vision for Scotland is of a society that is thriving across economic, social and environmental dimensions and that delivers sustainable and inclusive growth for the
people of Scotland: what we are calling a wellbeing economy. Scotland has many strengths, but also underlying structural economic challenges. There is no doubt that the economic crisis precipitated by the COVID-19 pandemic has made this much harder in the immediate term. However, it also provides opportunity. As the Advisory Group’s report notes:
“We came into this period seeking to lay the foundations of a robust wellbeing economy. We must come out of it with an additional focus on resilience.”

1.1 Scotland’s Economy and the impact of COVID-19

2. The COVID-19 pandemic is primarily a public health emergency, but one that has
created an economic crisis, impacting across all sectors of Scotland’s economy, business, workers and households. The virus continues to pose real risks. However, with sustained progress made in suppressing the virus, Scotland has been able to gradually move through the phases of its recovery route-map.^[2]

3. Economic recovery is best delivered if we all work together to continue to suppress
the virus and drive toward elimination even though that might mean some continued economic disruption. We will look to work as closely as possible with business and we expect business to work with us to support the efforts to drive out the virus. One of the biggest economic investments the Scottish Government is making is in the NHS and in particular in Test and Protect. The ability to stay on top of outbreaks is vital to maintaining an open economy. This is both a public health and an economic investment, and is the most significant commitment the Scottish Government can make to economic recovery.

4. Scotland’s GDP grew 1.5% in May following sharp falls of 18.9% in April and 5.5% in March. Compared to February, Scotland’s GDP was 22% lower in May. This is significantly bigger than any previous economic contraction.

5. Around one fifth of businesses closed during the first lockdown phase, with an estimated 736,500 workers furloughed at the end of June and around 155,000 self-employed claiming under the Self-Employment Income Support Scheme. The claimant count almost doubled between March and May to a rate of 7.8%, signalling rising unemployment, coupled with a sharp slowdown in earnings growth.

6. Scottish Government analysis suggests that the most-exposed sectors are prevalent in rural local authorities. Rural and island economies continue to face particular pressures given their greater reliance on micro and small businesses and self-employment, the seasonal nature of many businesses, in particular the greater reliance on tourism, and the loss of both export markets and domestic food service markets.

7. We know that long-lasting negative impacts (labour market scarring) can be significant for those entering work in a recession, impacting disproportionately on certain groups particularly young workers, disabled people, minority ethnic people and women.

8. Additionally, lockdown measures have had significant social impacts, many of these unevenly distributed across the population, exacerbating existing inequalities. Social isolation has been particularly acute for those with underlying health conditions and the elderly. We have seen unequal home learning with increased concern about vulnerable children and neglect. Increased childcare responsibilities at home, have overwhelmingly fallen on women. Lower-income households are more likely to live in smaller apartments and find more difficulty accessing local green spaces, making staying-at-home more detrimental to wellbeing.

9. Nevertheless, we have also seen some positive opportunities emerging for the economy. The speed and adoption of digital technology to work, socialise, engage with public services and shop has sustained employment and maintained societal bonds. The importance of the strength and resilience of Scotland’s national digital and data infrastructure, the inter-operability of public services, and the need for digital skills across the spectrum of economic sectors, but also, the consequences of digital exclusion has been put into sharp focus. We must capitalise on the gains, but equally in doing so, we need to ensure that we explicitly tackle the underlying inequalities as part of our approach to the economy in order to unlock our full economic potential.

10. On the environmental side, we have seen a fall in emissions and a behavioural change towards active travel and working from home. However, there has also been a corresponding fall in the use of public transport and a rise in car journeys that may prove difficult to reverse in the short term. In our economic recovery and social renewal, again there is an opportunity to lock in the positive aspects of these changes in a way that enables more flexible, local and environmentally sustainable approaches to business, work, travel and the delivery of public services.

11. The long run impact of the crisis, on businesses, communities and households, will depend on the duration and severity of the downturn and the effectiveness of our response. Whilst some sectors have managed to continue to operate satisfactorily, with staff working from home or other arrangements, other industries have not been fully operational or have temporarily ceased trading. Some sectors will take time to fully get back to normal such as in the arts and entertainment industries. In addition, there will be scarring effects where companies have permanently ceased trading.

1.2 Public Finances and Economic Recovery

12. The economic recovery also needs to be considered in the context of our public finances as the pandemic, and the resulting reduction in economic activity, will significantly raise government expenditure and reduce tax receipts.

13. The latest public sector finance data show the potential fiscal impact. The UK Government borrowed £128 billion in the first three months of the financial year, the highest borrowing in any April to June period since records began in 1993. As a result, UK public sector net debt rose to £1.98 trillion, or 99.6% of GDP, in June 2020. This is the highest debt to GDP ratio since 1960/61.

14. The Office for Budget Responsibility (OBR) expects the UK’s fiscal deficit to reach between 15% and 23% of GDP in 2020-21, depending on the speed of the economic recovery – the highest peacetime level in 300 years. While borrowing and debt are high, there are currently no signs that the UK Government is struggling to finance itself. However, the OBR has warned that in the longer term, there will be a need to take measures, to return the public finances to a sustainable path.

15. Both the UK and Scottish Governments have provided unprecedented support to help protect jobs, enable businesses to survive and limit the longer-term damage to the economy. At an estimated cost of £192.3 billion (10% of GDP), the UK Government’s fiscal response already exceeds the fiscal support provided at the height of the financial crisis in 2008-09.

16. Despite this, it is clear that further fiscal support will be needed as we emerge from this economic shock. On 8 July 2020, the Chancellor announced a “Plan for Jobs” worth around £20 billion according to provisional estimates by the OBR.

17. While we welcome this investment, we will continue to call on the UK Government to go further and adopt our bold and practical proposals for a UK-wide £80 billion (4% of GDP) fiscal stimulus to regenerate the economy and reduce inequalities as set out in our paper COVID-19: UK Fiscal Path – A New Approach^[3]. This includes a call to adopt flexible fiscal rules which prioritise economic stimulus over deficit reduction in times of crisis; agree a ‘national debt plan’; accelerate major investment in low carbon initiatives, energy efficiency and digital infrastructure; choose to use public money to protect jobs and livelihoods by strengthening the safety nets through support schemes and the welfare state; and extend Scotland’s financial powers to allow it to shape its own response to the pandemic.

18. The steps that we take towards economic recovery from the COVID-19 pandemic will also occur in the context of BREXIT, the end of the Transition Period on 1 January 2021, and deep changes to Scotland’s economic relationships thereafter. The cumulative impacts of the COVID-19 and BREXIT shocks will be severe. Scottish Government modelling indicates that ending transition this year would result in Scottish GDP being between £1.1 billion and £1.8 billion lower by 2022 (0.7 to 1.1% of GDP), compared with ending transition at the end of 2022. That would be equivalent to a cumulative loss of economic activity of between nearly £2 billion and £3 billion over those two years. This will clearly hamper recovery from the impact of the pandemic. Scottish companies will be in a much more fragile state and less able to absorb the impact of the end of the transition period because of the need, rightly, for both business and government to focus on COVID-19. Most key sectors of the economy will be adversely affected, coming on top of severe COVID-19 impacts.

19. Despite the impact of BREXIT, we are also committed to maintaining as close as possible a collaborative relationship with the EU, and our partners across Europe, with whom we are well aligned in terms of the wellbeing economy, and where collaboration in areas such as research and innovation will continue to be crucial to economic prospects.

1.3 A Wellbeing Economy for Scotland

20. A society that is thriving economically, socially and environmentally will deliver sustainable and inclusive growth for the people of Scotland. This means creating an economy that is environmentally sustainable, where businesses can thrive and innovate, and that supports all of our communities across Scotland to access opportunities that deliver local growth and wellbeing through tackling inequalities.

21. There is a growing body of international evidence from organisations such as the OECD which supports this approach. A sustainable, inclusive economy is also a more resilient economy: reducing inequality and improving the wellbeing of citizens through a human rights-based approach, can be complementary with achieving economic growth. Investing in our natural capital and seizing the new opportunities presented by the transition to a carbon neutral, circular economy^[4] will also help to build a stronger, more resilient economy.

22. The wellbeing economy agenda is not about zero or de-growth for Scotland – it is a commitment to deliver an approach that improves our economy through good quality jobs, and in a way that enhances the quality of life and is compatible with a net zero, sustainable economy.

23. Delivering a wellbeing economy has been a central priority in recent years and Scotland is a founding member of the Wellbeing Economy Governments (WEGo)^[5] initiative, where member countries work together to understand the key priorities for a wellbeing economy. Our membership of this group enables us to engage, learn and collaborate with other countries and utilise the advice of experts as we set our path to recovery and renewal.

24. A Wellbeing Economy is characterised by the following principles:

• Economic progress and prosperity: A thriving, innovative and entrepreneurial private sector with growing and sustainable businesses is central to a Wellbeing Economy. This includes growing investment in innovation, expanding our internationalisation opportunities, providing quality employment opportunities for people across Scotland that respect Fair Work principles and supporting the transition to a sustainable, net zero economy.
• Inclusion: Ensuring that all people and communities across Scotland feel the benefits of, and are able to contribute to, our economy and society is central to creating a wellbeing economy. We are committed to embedding equalities and human rights at the heart of our approach, including tackling intergenerational inequalities, and child poverty. Our approach to the economy therefore, requires addressing both inequalities in opportunities and outcomes across groups of people and ensuring that all regions and communities in Scotland are supported to thrive and prosper; irrespective of whether locations are urban, rural, island or somewhere in between.
• Sustainability: A wellbeing economy is about both current and future wellbeing. Environmental, economic and social sustainability is central to this. All countries will have to adjust to a more resource-efficient and sustainable economic model, to protect and restore the natural environment and help us live within the planet’s sustainable limits. In line with Scotland’s ambitious Environment Strategy, we are seeking to build a thriving, sustainable economy in Scotland that conserves and grows our natural assets, both from the development of the low carbon, circular economy and from investing in and using Scotland’s natural resources more efficiently.
• Resilience: A wellbeing economy must be ‘future proof’ and agile enough to withstand and respond to external risks and shocks. Economies have greater resilience when people have a stake in them and when they are more diverse. These factors make it more likely that we will have the capabilities to flex and repurpose businesses, skills and talents to changing circumstances, investing in and protecting our ‘four capitals’ – economic, human, social and environmental – the wellbeing assets that are critical to protect and grow for current and future generations.

This infographic provides an overview of the Wellbeing Economy Monitor. The purpose of this monitor is to help us achieve our vision of an economy that delivers sustainable and inclusive growth for the people of Scotland. This is based on creating and growing a wellbeing economy founded on three pillars: growth, inclusion and sustainability. The growth and inclusion pillars are supported by the inclusive growth outcomes: place, people, participation, population and productivity. The monitor is built on Scotland’s National Performance Framework. A wellbeing economy promotes intergenerational wellbeing through maintaining, investing in and growth of our four capitals. The four capitals are the assets that generate wellbeing for current and future generations. These include:

1. Human capital. This includes the skills, competencies and mental and physical health status of individuals;

2. Natural capital. This includes critical aspects of the natural environment: assets and ecosystems.

3. Social capital. This includes civic engagement, social network support, personal relationships and trust, and co-operative norms.

4. Economic capital. This includes productive capital (buildings, transport infrastructure and knowledge assets such as Research and Development) and financial capital.