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The Government Economic Strategy




In 2007, the Government Economic Strategy made clear the scale of the challenge in putting Scotland on a higher sustainable growth path. For 30-years our average growth rate was well below that of comparable small European economies and had also lagged behind the UK.

To meet this challenge, we established a series of demanding targets focussed on the drivers ( Productivity, Participation, and Population) and the characteristics ( Solidarity, Cohesion, and Sustainability) of growth which underpin the Purpose Framework. We also put in place targets to raise Scotland's growth rate to match that of our near neighbours. The Government Economic Strategy reaffirms our commitment to these targets.

Improving Scotland's sustainable economic growth rate will take time. Recent global events have made the challenge that much harder. We are also constrained by the lack of economic levers at our disposal. With independence, we would have access to the full range of levers to create jobs, attract investment and boost growth. This is why we believe securing independence is so important for Scotland.

However, there are also exciting new opportunities for Scotland which we are determined to take advantage of. The transition to a low carbon economy and the growing importance of exports are two excellent examples of the potential growth areas for Scotland in the years ahead.


During the summer of 2008 and into 2009, the global economy experienced two powerful shocks: the emergence of an international financial crisis and a severe commodity-price spike. These shocks resulted in a dramatic fall in global demand.

What began as a problem in the US mortgage market had, by autumn 2008, developed into an international credit crunch and a crisis of confidence. This precipitated a systemic financial crisis and the collapse or near-collapse of several of the world's largest financial institutions.

Rescue packages were adopted in most advanced economies, including an unprecedented degree of support for the banking sector. However, given the scale of the crisis these actions were not able to prevent the global economy from entering recession.

While all countries were affected to a varying degree, divergences in the size and length of the impacts did emerge. These divergences were driven by the unique structures of individual economies rather than any generic feature such as size or location. As more evidence has emerged on performance, it is clear that those countries most exposed to global trade flows, the fallout from the financial crisis, and declines in house prices suffered the greatest impact.

Figure B1: Level of Output across the G7 (2008 Q1 = 100)

Figure B1: Level of Output across the G7 (2008 Q1 = 100)

Since emerging from recession in late 2009, the global economy has yet to fully recover the losses of the downturn. The recovery has not been helped by continued uncertainty over the full implications of the credit-crunch. Concerns over sovereign debt have arisen in Europe with, so far, Greece, Ireland and Portugal needing direct financial support; whilst fears still remain as to whether further Euro Area countries will also require support. The uncertainty was further increased by the downgrading of the USA's credit rating in Summer 2011.


Scotland, like most other developed economies, was not immune to the impacts of the global downturn. Our economy entered recession in mid-2008 before returning to growth in late 2009.

Since then, and as chart B2 highlights, output in the Scottish (and UK) economies has been volatile with a number of temporary factors - such as the severe winter weather in late 2010 and early 2011 - having an impact on the economy. Looking forward, with continued global uncertainty likely, output is expected to remain volatile for a time before it stabilises.

The deterioration in economic conditions created a range of short-term pressures. For example, there was a fall in employment and rise in unemployment. As with previous recessions, the challenges have been particularly difficult for our young people.

The overall unemployment rate in Scotland now stands at 7.7%, slightly below the UK figure of 7.9%.

There has been a recovery in employment in Scotland since Spring 2010, although levels still remain below their pre-recession high. Figure B3 highlights Scotland's employment performance against the countries in the UK since 2007. For the majority of the time period, Scotland has maintained its position as the top performing country of the UK. While Scotland temporarily lost this position in 2010 - as a result of a relatively sharp decline during late 2009 and early 2010 - employment levels in Scotland have recovered somewhat and we are once again the top performing country in the UK.

Figure B2: Quarterly GDP Growth Rates in Scotland and the UK (source: Scottish Government, and the Office for National Statistics)

Figure B2: Quarterly GDP Growth Rates in Scotland and the UK (source: Scottish Government, and the Office for National Statistics)

Figure B3: Quarterly Employment Rates (16-64) for countries of the UK

Figure B3: Quarterly Employment Rates (16-64) for countries of the UK

The deterioration in labour market conditions has impacted disproportionately on different groups. Similar to previous recessions, young people were amongst the first to experience a deterioration in labour market conditions as employment opportunities became more limited.

To date, males have accounted for the largest proportion of the adjustment in the labour market. Data for the 3 month period April to June 2011 shows that compared to the pre-recession peak in employment - in the 3 month period March-May 2008 - male employment rates were 3.9 percentage points lower, whilst female employment rates were 1.7 percentage points lower. However, data also suggests that this balance may be shifting, with male employment increasing and female employment falling in the most recent months. Despite this, according to figures for April to June 2011, the female employment rate in Scotland is the highest of all UK countries and Scotland's female unemployment rate is lower than in the UK as a whole.

While there has been a rise in unemployment, the impact on the labour market was not as severe as had been initially feared (based on what could be expected from previous recessions) or as experienced by some of our close trading partners in Europe and the USA.

At the first signs of a global slowdown, we responded with a detailed Economic Recovery Plan 3. The Economic Recovery Plan was firmly embedded within the principles of the Government Economic Strategy, and provided a range of targeted policy responses to deliver short-term support and minimise any lasting impacts from the recession.

The Economic Recovery Plan helped to enhance the resilience of the Scottish economy, and as a result, Scotland can reflect upon a recession that was shallower than for the UK as a whole. During the recession, output fell by 5.7% (peak to trough) in Scotland, compared to 6.3% in the UK.

The aim of the Government Economic Strategy is not only to offer greater protection to the economy during periods of economic uncertainty, but to bring about a long-term, or structural, change in Scotland's sustainable growth rate. In recent decades a gap has emerged in GDP growth performance between Scotland and the UK. For example, over the 30 year period 1976-2006 Scotland's average annual growth rate was 2.0% compared to 2.4% in the UK - a gap of 0.4 percentage points.

Assessing progress against this challenge since 2007 is difficult, as not only has a short time period elapsed, the intervening years have been particularly volatile and are not a good period to assess long-term performance.

However looking at the data we have, over the period 2007 to 2010 (the most recent full year for which data are available) both Scotland and the UK experienced average annual declines ( i.e. negative growth) in output of 0.2% - giving a relative gap of 0.0 percentage points.


A legacy of the economic crisis has been the impact on public sector finances across the world and in the outlook for future budgets.

In 2011/12 alone, the Scottish Government DEL budget - the element of the budget that funds day-to-day public services - was cut by 6.3% in real terms. This is just the beginning of a period of sustained consolidation in public spending.

As highlighted in Figure B4, based on the current plans of the UK Government it is estimated that it could take until 2025/26 for the Scottish Government budget to return to 2009/10 levels in real terms - an adjustment period of 16 years. Over the entire period, the cumulative loss foregone could be close to £40 billion.

Within this overall settlement imposed by Westminster, the Scottish Government's capital budget - a key driver of economic growth - will bear the relative burden of the cuts with a real terms cut of approximately 35% over the current Spending Review Period.

These budget trends have two major implications. Firstly, as the Office for Budget Responsibility has outlined, the withdrawal of such demand from the economy (at the UK level) will mean that the public sector will make a negative contribution to aggregate demand over the next few years. Secondly, the resources available to government to support growth in the wider economy will be greatly reduced.

Figure B4: Estimated Scottish DEL 2009-10 to 2026-27

Figure B4: Estimated Scottish DEL 2009-10 to 2026-27

To address the challenges that the fiscal climate presents, the Scottish Government has shown leadership in driving forward public service reform and efficiency savings. In this regard, the work of the Independent Budget Review and the Christie Commission have been vital in helping to inform our response.

In 2007, we announced tough efficiency targets of 2% per annum. In the years since, we have exceeded our target in each and every year. In 2008/09, savings of £839 million (£300 million above target) were obtained, while in 2009/10 savings of £1,470 million (£400 million above target) were secured. We are on course to exceed our target of £1,603 million for 2010/11 and we expect public bodies to deliver efficiencies of at least 3% in 2011/12. It is clear that the scale of the challenge that now confronts us means we will need to continue a programme of efficiency and public service reform over the coming years.


Economic conditions remain challenging and we must remain vigilant to the ongoing challenges of unemployment and global uncertainty.

The weakening of the global recovery in recent months has increased concerns over the Euro Area Sovereign Debt crisis, led to volatile stock markets and had a detrimental impact on confidence.

Growth has also now slowed in the emerging countries, which have been driving global recovery, due to inflationary pressures prompting policy makers to cut back spending and increase interest rates.

In the Euro Area, France and Germany, who had initially recovered strongly after exiting recession, have slowed in 2011 bringing down the overall Euro Area growth rate. The strength of recovery of the Euro Area is of particular relevance to Scotland as it is a key market for Scottish exporters. Japan continues to struggle and had fallen back into recession following the tsunami and earthquake; whilst the US economy is also losing momentum.

It is also clear that the UK recovery is weakening with most indicators pointing to a more uncertain outlook. Nearly all growth forecasts for the UK economy have been consistently revised down during 2010 and 2011. This reflects increased vulnerabilities, especially within the Euro Area, and the continuing squeeze on household incomes impacting on domestic demand.

As demonstrated through our Economic Recovery Plan, the Scottish Government continues to adopt a flexible approach in response to these ongoing challenges.

However, we are limited in the powers that we control and have urged the UK Chancellor to take decisive action to protect growth and jobs.

The Scottish Government believes that the UK Government must respond to the weakening economic outlook with a plan to protect the recovery and ensure that the UK's fiscal plans remain on track. If the recovery was to remain weak (or even falter), the shortfall in tax revenues and rise in unemployment benefits would only serve to exacerbate the deficit.

Therefore we have put forward a Plan for Recovery focused on:

  • Capital Investment;
  • Access to Finance; and
  • Enhanced Economic Confidence through prioritisation of Growth, Employment and Income Security.

While we fully recognise the need to restore the public finances, ultimately the most effective way to achieve this is through economic growth. Any doubts over the ability to deliver growth will only serve to undermine attempts to restore the public finances to health and risk increasing the charges we pay on government borrowing.

Plan for Recovery

Recent economic data indicates that the global economic recovery is fragile. Economic uncertainty is acting to dampen growth, while a lack of investment in the world's major economies is limiting job prospects.

In the UK, forecasts for the recovery have been revised down consistently over the last year. The Scottish Government has been clear, since the very first signs of a slowdown in growth prospects, that action is needed in three priority areas.

Firstly, capital investment is key to economic recovery. Investment is usually one of the first elements of the economy to contract during a recession. However, it is also vital to growth as it not only provides a timely boost to economic activity and jobs but it creates a legacy of assets which can have long-lasting economic benefits. We have been clear that the significant cuts to the Scottish Government budget are too far and too fast. In particular, capital spending must be supported given its importance to the economy and links to future tax revenues.

Secondly, securing affordable finance remains a considerable challenge and further action is needed to ensure that viable businesses have access to the funding they require to grow and support jobs. The recovery is being held back by limited private sector investment - indeed, overall investment in the UK remains some 15% below pre-recession levels. Evidence shows that while many large companies have significant cash holdings or can access capital markets directly, for most Small and Medium-sized companies bank lending remains the key source of finance. Unblocking this is key to helping the recovery gain traction.

Thirdly, to combat the uncertainty that is facing households and businesses, we need action to provide greater economic security and protection, as far as possible, from rising prices.

Within the constraints of the current devolution settlement, we are doing everything possible to promote growth and secure jobs in these three priority areas.

Firstly, and within our fixed spending envelope we are taking forward an ambitious programme of infrastructure investment - including the Forth Replacement Crossing and the South Glasgow Hospitals project. We are also rolling out a £2.5 billion programme of NPD investment to help offset the worst impacts of the UK Government's capital spending cuts.

Secondly, on access to finance, we are maintaining the pressure on the UK Government and banks to ensure that they meet their lending commitments - particularly to small and medium-sized companies. Alongside this, the Scottish Investment Bank will continue to support early stage innovative technology based businesses, and growth and exporting companies. In addition, we will work to leverage in more private sector investment from our own targeted capital investments. For example, our National Renewables Infrastructure Fund aims to tap in to the appetite in the private sector to invest in renewables and help deliver our ambitions for this sector.

Thirdly, we are promoting economic confidence and security through our policy of no-compulsory redundancies for the 30,000 staff governed by our pay agreement to the end of March 2012. A similar commitment has been given to staff in the NHS in Scotland. As we ask for pay restraint we are meeting core economic and social commitments through our 'Social Wage' including key initiatives such as pay increases for the lowest paid in the public sector, the freezing of council tax and water bills and the abolition of prescription charges.

And finally, we are also taking direct action to tackle unemployment and ensure that people who are out of work or underemployed - particularly our young people - have access to the right training, skills or education opportunities to meet their needs. We are delivering over 46,500 training opportunities this year - the majority of which are targeted at our young people - including a record 25,000 Modern Apprenticeships.


Despite the challenges that we have faced as a result of the global downturn, progress has been made since 2007.

We now have a better understanding of the challenges and opportunities facing us as we accelerate the transition towards a low carbon economy. We have also had an opportunity to reflect upon the sustainability of certain aspects of global growth in the run-up to the financial crisis in 2008.

There is a growing acceptance that in the years immediately prior to the crisis, the rate of growth in certain sectors of the global economy was not sustainable. Demand driven by a credit boom, and funded by emerging markets, could only last for so long. As a result, the world economy is likely to go through a period of restructuring with greater emphasis placed on exports from Europe and the US. This poses a challenge for Scotland - with the share of our business base devoted to trade smaller than many of our competitors. However, it also provides an excellent opportunity to rebalance our economy and take advantage of the growing demand for our products and services.

In particular, developing and emerging economies will continue to drive global growth (as highlighted in Figure B5). This will result in significant opportunities for Scottish companies to tap into these rapidly expanding markets.

The recovery over the medium term will therefore be driven, in part, by increased contributions from net trade as Scottish firms look to increase their export activity and as domestic supply chains are strengthened.

Investment will play a vital role in driving future growth performance. The public sector has an important role in supporting investment through maximising the impact of its capital spending. During the recession increases in general government investment countered some of the decline in business investment (as highlighted in Figure B6, which summarises trends in UK Gross Fixed Capital Formation - a measure of public and private sector investment).

However, for recovery to be sustained - and for faster sustainable economic growth to be delivered - the main driver will be increases in levels of private sector investment. As set out in our Plan for Recovery this requires appropriately functioning capital markets, and for a climate to be created where companies with available capital feel confident in taking forward investment.

Figure B5: Two Speed Recovery in the Global Economy (Source: IMF June, 2011)

Figure B5: Two Speed Recovery in the Global Economy (Source: IMF June, 2011)

Figure B6: Index of UK Public and Private Sector Gross Fixed Capital Formation (Source: ONS)

Figure B6: Index of UK Public and Private Sector Gross Fixed Capital Formation (Source: ONS)

Over the longer-term, there is a clear need for the global economy to respond to the challenge of climate change. The requirement for industries, firms and consumers to move to low carbon processes, products and services, is both an economic and environmental imperative. Once more while this poses a challenge, Scotland has a tremendous opportunity to lead the way, particularly in areas where we have abundant natural energy resources as well as long established academic and offshore engineering expertise.

In the long-run our success will depend upon the ability of our economy to adjust to these short and medium term challenges and to take advantage of the new opportunities that will emerge. This is why our focus on improving the drivers of growth - Productivity, Competitiveness and Resource Efficiency; Labour Market Participation, and Population Growth - and the characteristics of growth - Solidarity, Cohesion, and Sustainability - set out in the Purpose Framework is so vital.