Swinney: Opportunities for Scotland's economy

John Swinney describes the opportunities for Scotland's economy at a speech at Glasgow School for Business and Society at Caledonian University.
Swinney: Opportunities for Scotland's economy

As we meet a week before what will be crucial elections in Greece, and in the light of significant developments in the Spanish banking sector, it is right that we acknowledge the current context and the challenges this presents.

This weekend, an agreement was reached to support financial stability through the bailout of Spanish banks.

The €100 billon bailout of the Spanish banking sector is an important step. While it is far too early to reach any firm conclusions as to the success of this initiative, it is encouraging that markets have reacted positively to the measure.

As an open economy with strong international connections, events in the Euro Area have implications for the economic outlook in Scotland.

Nearly half – 45% - of our exports are destined for the Continent. And the continued recovery of the global banking system depends upon a return to confidence and stability in the European banking market.

Scotland has begun to demonstrate some clear signs of recovery however as today’s figures from the Bank of Scotland show we are still being buffeted by the economic cross wind from Europe. A swift and continued resolution to the crisis is therefore vital for Scotland and businesses across Scotland.

However, just as importantly is recognition from the Chancellor that he too has a responsibility to act. Rather than seeking cover in the Euro crisis the Chancellor should acknowledge that much of the responsibility for the lack of growth in the UK economy since the onset of recession back in 2008 lies at his own door.

The Chancellor’s approach has placed too much emphasis on austerity - and not enough on promoting growth. An approach which is clearly self defeating as the most recent UK GDP results show.

Compared to pre-recession levels, output has recovered more in Finland, Norway, and Sweden than it has in the UK. Sweden is now 2% above pre-recession levels whereas the UK is still 4% below its pre-recession level.

As Finance Secretary I am continually reviewing the support the Scottish Government is able to give to economic recovery and I give the assurance that I will pursue any appropriate opportunities to take more action within the constraints available to me.

On my visits across Scotland, I see a business community that is working hard to achieve success both domestically and internationally despite the challenging economic and financial backdrop. That work must be supported by a UK Government equally committed to pursuing an agenda for growth.

The business community, better than many, understand the difficult choice between investing in growth opportunities during tough times and retrenching to protect your position.

In the light of the challenges in Europe and at home, a speech on opportunity, confidence and the prospects for Scotland may seem somewhat out of place.

However, it is often in tough and challenging times that the most significant and exciting new opportunities emerge and as a nation we must be willing to grab them. For example, while the European economy continues to struggle, we are seeing the continued emergence of growth markets in Asia and South America and growth industries of the future – such as our renewables and low carbon sectors – continue to power ahead.

Scottish firms in those industries of the future are making substantial progress in growing their market share at home - for example, Steel Engineering, just down the road in Renfrew, has recently secured a contract to build a new tidal energy device creating over 120 new jobs.

In emerging markets Scottish companies are making real progress, growing their international presence and showcasing Scottish ingenuity to the world. Alexander Dennis in Falkirk has developed a new generation of fuel-efficient hybrid vehicles which they are now exporting to an increasingly receptive international market.

Only Last week the company announced they are establishing new operations in North America and Australia. Alexander Dennis are now a global leader and we should take great pride in the significant position this Scottish company now has in the world of manufacturing.

And finally, Scotland continues to work hard to attract international investment demonstrated by the large number of major multinational firms – such as GlaxoSmithKline, Aker Solutions, Amazon, Samsung, Mitsubishi and others - who have all recently invested in Scotland.

The current Ernst and Young UK attractiveness survey ranks Scotland as the most successful location in the UK for attracting inward investment in terms of jobs - a direct reflection of our attractiveness as a place to do business globally and the quality and productivity of our workforce.

And much of this success is coming to this city, for example Gaia-Wind and Dell Computers have both recently announced plans to expand and create new jobs in Glasgow.

And despite the challenges in the Euro Area, we have continued to see significant announcements in Scotland even in the last month.

Diageo announced last week that it plans to invest £1bn in the Scotch whisky industry creating 100 new jobs with wider benefits across the Scottish economy.

And last month, Marine Harvest – the salmon producer – announced further investment in its Scottish operations over the next 5 years with plans to create 100 new jobs.

The efforts of Scottish businesses are perhaps most clearly demonstrated in the improvement in the labour market in recent months – where overall unemployment has been falling and employment rising.

I believe therefore that despite the challenges we face, there is confidence in Scotland and we should be positive in our outlook for the future.

Last month, Scottish Enterprise launched a ‘Yes to Growth’ campaign to help encourage Scottish companies to invest in their own growth.

Alongside this in April, Scottish Development International launched a new marketing campaign to attract international companies to Scotland.

We are also looking at new and innovative ways for the private and public sectors to work together to assist business growth – particularly new start-ups and fledging companies.

On Friday the First Minister announced that Scottish Enterprise, through the Scottish Investment Bank, is investing £1m into Prince’s Trust Youth Business Scotland (PTYBS) loan fund, which offers grants of up to £5,000 to young people aged between 18 and 25 who wish to set up or grow their business.

And new entrepreneurs are being given a helping hand with the launch of Scotland's first business accelerator programme. Entrepreneurial Spark, hosted here in Glasgow by Willie Haughey OBE, is providing free workspace, IT access and mentoring and to some inspiring young businesses and last Thursday I had the pleasure to officially open the 2nd facility, hosted by Sir Tom Hunter at his premises in Ayrshire.

So contrary to the relentless series of headlines we see each and every day, there are positives out there and progress is being made.

Retaining confidence in what we do as a nation is crucial if we are to be successful and strengthen the Scottish brand.

We do not always fully grasp or celebrate the potential – and indeed the many successes – of the business community in Scotland, yet as I have set out we have much to be proud of.

Our universities– like the one we have gathered in this afternoon – are truly world-class.

Scotland ranks first in the world in terms of research productivity per unit of GDP and second in the world in terms of research impact.

And with that world class reputation comes students from all over the world – with 435 overseas students registered to degree programmes in this Business School alone.

This international outlook and the relationships built at universities like this will be vital to our success in an increasingly interconnected global marketplace.

In the creative industries for example, our gaming companies lead the world, while Scottish firms are now playing a part in driving the market for Apps and mobile technology.

Alongside this, we continue to see growth and expansion in industries that have served Scotland well over decades such as food and drink, tourism and financial services.

And we are not scared to take advantage of any opportunity to showcase these strengths. In what some would think an unlikely partnership Visit Scotland are working with Disney-Pixar in advance of their new animated film, ‘Brave’, to promote our tourism, arts and environment in over 70 countries.

The SNP Government Agenda for Cities recognises the contribution of all our cities – all seven of them - and their regions. Cities – such as Glasgow - and their regions deliver two thirds of Scotland’s GVA and produce over 60% of Scottish exports.

Last year we launched the £7 million Cities Investment Fund to help develop collaborative programmes that promote growth, lever investment and create jobs across Scotland’s seven cities and their regions.

And, as we look forward, we can also call upon Scotland’s fantastic natural resources.

It’s not always a cause for celebration that we can on occasion – even in June!! – be one of the wettest and windiest places in Europe, but in terms of our economy it is a vital source of our future wealth as the world looks to develop clean and sustainable energy sources.

In addition to forty more years of oil and gas reserves, we have 10% of Europe’s wave energy, 25% of its tidal energy, and 25% of its offshore wind resources.

It is interesting to note that on this day – 11 June - in 1975, the first oil flowed in to Scotland at Sullon Voe refinery on the Shetlands. It’s also noteworthy that on the 12 June 1975, the Daily Mail ran a story that Scotland’s oil and gas reserves were running out and Scotland could not afford to be independent.

It is a simple fact that even without our offshore oil and gas reserves, Scotland enjoys the third highest output per head in the UK, after London and the South-East. And when oil and gas figures are added, Scotland’s performance is 15% above the UK average.

For all of these reasons and more - including the quality of life that cities such as Glasgow can offer - Scotland is a place of opportunity, a good place for business, and a country with a strong future.

In this regard, devolution has been a major boost and 1999 marked a step change in our ability to ensure Scotland offered opportunity for the Scottish people.

The policies pursued within the Scottish Parliament are well rehearsed but it is worth reminding ourselves of the progress we have made.

Our Parliament has witnessed the introduction of groundbreaking reform, including the smoking ban and world-leading climate change legislation.

These policy choices are a clear and very real expression of Scottish principles and ideals – something that had not been possible before 1999.

On economic policy, even our limited powers have allowed change for the better.

Since first coming to office in 2007 we have taken forward a range of measures to help unlock Scotland’s economic potential including modernising the planning system, creating the most favourable business rates environment in the British Isles and introducing measures such as the Small Business Bonus scheme to support small businesses.

The devolution of powers has also enabled us to make different choices to the rest of the UK to not just in reaction to the challenges we face but to reflect different ideals about the type of economy and society we wish to create.

At the height of the financial crisis in 2008, we were able to launch our own Economic Recovery Plan which coordinated the efforts of the public sector to protect the Scottish economy at its toughest time. Our actions – in particular our investment in capital spending and our protection of household incomes - meant, that while deeply damaging, our recession was both shorter and shallower than for the UK as a whole.

Similarly - unlike elsewhere in the UK – we have continued with free higher and further education because of our continued belief that long-term economic success depends upon nurturing the talents of our young people. Success in Scotland will be based on the ability to learn and to grow rather than the ability to pay.

Our policies have also enabled us to retain our Enterprise bodies and focus them on growth and recovery – in contrast to other parts of the UK where they have been abolished.

As a Financial Times editorial commented last year, “while parts of England are still struggling to adjust to the abolition of regional development agencies, Scotland has benefited from stability and continuity offered by Scottish Enterprise…and its inward investment arm, Scottish Development International.”

And our record on inward investment has been entirely vindicated by recent successes in Scotland and the failure of regional policy in England

But while we have made progress - we are hampered by the restrictions of the current settlement which mean that the vast majority of key economic levers remain controlled by Westminster.

For example, our Parliament currently controls just under 10% of Scottish tax revenues. And the modest powers of the new Scotland Bill will only increase this to just short of 20%.

We also lack control over many of the other levers of growth such as regulation and have few opportunities to represent Scotland’s distinct interests at a European or international level.

So while we have made progress with devolution, I believe that with independence we could do much more.

If we can take the right decisions for Scotland in higher education and health why not on the economy?

I believe that it would be better for us all – particularly business in Scotland - if decisions about our future were taken by the people who care most about Scotland – the people and businesses working in Scotland.

So let me take the opportunity in the 2nd half of my remarks to talk through the opportunities I see for business under independence.

I set out in a speech to the David Hume Institute at the Royal Society of Edinburgh back in February my vision of the overarching economic framework for an independent Scotland.

We are fortunate to have a number of experts to help us design the detail behind this proposal under the auspices of our Fiscal Commission Working Group which includes two Nobel Lauriat Professors.

Our framework is one of monetary union with the rest of the UK.

Retaining the pound under independence is something that I believe is in the interests of Scotland, the rest of the UK and the stability of Sterling itself.

As an internationally tradable currency Sterling is as much Scotland’s currency as it is the currency of England and Wales, and a formal monetary union is the clear way forward.

Regardless of what may be said in the heat of constitutional debate it would simply not make sense for anyone to resist the creation of a formal Sterling zone and the mutual benefit it would bring.

Our on-shore economy is approximately 8% of the UK’s – broadly equivalent to the size of the entire UK financial sector – while many of our key sectors such as oil and gas, financial services and whisky make a significant contribution to the UK’s Balance of Payments. Oil and Gas UK estimate that oil and gas production in the UK boosted the UK’s balance of payments by £32 billion in 2010, almost halving the UK’s deficit.

Our economies share broadly the same structures with a free-flow of goods, services, labour and capital across the border which is in contrast to many in the Euro Area. Therefore we display all the characteristics of an optimal currency area.

A Sterling zone will provide businesses both in Scotland and the rest of the UK with the certainty and stability for trade, investment and growth.

And as the Bank of England takes on the role of regulator for UK financial services– a very sensible and long overdue position – retaining the pound will preserve the highly integrated UK financial services market.

That framework is solid and substantial and I know that understanding our proposal is important to many of you in making your decisions about Scotland’s future.

Within that framework my ambition and the ambition of this government is the delivery of faster sustainable economic growth with opportunities for all to flourish.

I believe that the opportunities of independence will bring these wider benefits of economic growth.

So with that in mind the next two and a half years are an opportunity for me to answer the question - ‘so what does independence actually mean for my business?’

Responsibility and opportunity are two things that businesses deal with every day.

The ability to take advantage of new opportunities and the responsibility to take tough decisions. It is the core of the business function.

An independent Scotland would allow our nation to work in exactly the same way.

Independence is about giving us the levers to nurture our talents, support creativity and innovation and reward our entrepreneurs.

But it also about taking full responsibility for all our actions as a nation, for the tough decisions, balancing the books and supporting those that need our help and compassion.

To build on Scotland’s natural competitive advantages, we need to use the full array of fiscal and economic levers to promote growth.

We need to invest in our infrastructure, skills and education; knock-down barriers to growth where they arise from too much government red-tape or lack of competition; and use our tax and economic powers wisely to attract and reward business growth.

As I mentioned earlier, with the one business tax we do control – business rates - we have taken steps to ensure that Scotland has the most competitive tax regime in the UK and we are now seeking to do the same with our new responsibility for property transaction taxes.

But with greater access to the levers of growth we could do much more. For example, corporation tax is one of the chief levers that government can use to promote growth, investment and jobs.

One of the challenges that we face as a country is that far too often many of our businesses or elements of a business – particularly headquarters and decision making functions - migrate to London and the South East.

The current system means that a company based in Glasgow or Dundee pays the same corporation tax rate as a company based in London.

Last week Ed Miliband proudly claimed that more people in Scotland were employed by companies based in the rest of the UK than in Scotland. For him it was an argument for the status quo. But to me and I know to many in the business community it is a clear sign that Small countries, and regional economies, need a fiscal edge to encourage these core business centres to settle and prosper.

An independent Scotland would enable us to design a corporation tax regime that attracted genuine economic activity to Scotland.

We have modelled the consequences of a 3% reduction in corporation tax, and found that it could support 27,000 jobs across Scotland.

We know that the UK Government agrees with us. The same logic is behind their UK wide cut to corporation tax levels and their support for tax devolution to Northern Ireland. But despite the unanimous recommendation of a cross-party Scottish Parliamentary Committee - that if corporation tax is devolved to Northern Ireland it should also be devolved to Scotland - the UK Government continues to withhold this power from Scotland.

We also lack the authority over other taxes which affect business – such as income tax and national insurance and are constrained in our ability to use these powers to make starting and developing a business or hiring new employees that much easier.

In addition to the tax regime, an independent Scotland would have much greater scope to shape the regulatory environment so that it not only promoted greater competition, but also encouraged greater consumer choice and technical innovation.

Independence would allow us to start afresh – in consultation with business – looking at these issues that matter to business and designing a system, as we are with our new taxation responsibilities, that works in Scotland’s interests.

As my remarks have just highlighted, good use of economic and tax policy is not just about the headline rate of taxation but also the nuances within the system.

Independence would be a distinct advantage as it would enable us to target, flexibly and efficiently, the levers of growth to address any weaknesses in the Scottish economy and to take advantage of new opportunities.

Independence would allow a future Scottish Government to target incentives to aid the development of new technologies such as in our renewable energy and low carbon sectors.

We could also target economic policy to assist those sectors that have a particularly significant impact on the Scottish economy.

We could adjust VAT rates to support our highly successful tourism and hospitality sectors, to encourage investment in repairs and maintenance, which would support the construction sector and local communities.

Many countries within the EU have already taken such action, leaving Scotland at a competitive disadvantage.

An independent Scotland would be able to promote a more aligned, collaborative and systematic approach to supporting industry.

Under independence the policies adopted could help to increase growth, to broaden the base of our economy and to reindustrialise Scotland. For example, building on Scotland’s reputation for manufacturing and engineering excellence which goes back decades, our clean energy sectors will facilitate a transformation of the Scottish economy.

To illustrate this point further, currently we don’t even have any influence over the Crown Estate Commissioners who manage Scotland’s seabed out to 12 nautical miles, and almost half of its foreshore. Yet it is companies in Scotland who are developing and investing in the technology to capture the wave and tidal power around our shores. Control of Scotland’s seabed, in a way that would allow us to fully coordinate the efforts of manufacturers, the energy industry, regulation and planning to help deliver the full benefits of the marine renewable energy revolution for Scotland.

The importance of responsibility and opportunity are perhaps seen at their starkest in Scotland’s small and medium sized enterprises –where having the ability and confidence to stand on your own two feet, but working with those around you, is the only way to see your business flourish.

And it is small and medium sized businesses that I want to deliver real benefits too. SMEs are the lifeblood of the Scottish economy. Collectively they employ over 1 million people accounting for around 54 percent of total employees in Scotland’s private sector, and are the source of many of our most dynamic and successful companies of the future.

Independence would provide a step change in our ability to support this important group of Scottish business. With independence we would be able to tailor the full package of support – from business rates, enterprise agency support, investment in training and skills development, regulation, competition policy, and design of an efficient tax system to best meet the needs of small business.

An independent Scotland would also have the opportunity to use its track record of innovation in policy making and finance to promote a more aligned, collaborative, systemic approach to financial assistance to industry.

For example Capital for Enterprise Limited (CfEL) is the UK Government’s centre of knowledge, expertise and information on the design, implementation and management of finance measures to support Small and Medium Size enterprises (‘SMEs’) across the UK.

CfEL currently have around £660 million of equity funding available for the whole of the UK, but Scotland has only 1% of companies in the portfolio by volume and around 3% by value, significantly below our population share.

A similar approach to these targeted interventions, designed specifically for Scotland could be adopted when attempting to attract international investment to Scotland.
Further Policy Example

As the world becomes more interconnected, innovation and its commercialisation will be key to boosting productivity and Scotland’s competitiveness.

Scotland is a country rich in opportunity and bursting with innovation but sadly we don’t translate this enough into greater commercial opportunities and growth.

As I highlighted earlier we have much to be proud of in our Universities. They are indeed world class. In 2010, Scotland’s Higher Education R&D as a percentage of GDP was ranked top of the twelve UK regions, and ranked third highest among the OECD countries. But in contrast, the value of our Business and Enterprise R&D was just 4% of the UK total – less than half our share of the UK population.

With our current powers we’re taking steps to help address this including by streamlining the commercialisation and innovation supported provided by our Enterprise Bodies. But Independence would provide us with new tools – tax credits for example – which we could use to help create a step change in R&D in Scotland.

Intellectual Property is at the heart of new research – it is key to encouraging innovation and creativity. Our own approach to Intellectual Property is already reflected in the work of the Scottish Funding Council to build a Single Knowledge Exchange office and ambition to build a standard commercial working agreement.

We recognise that the current systems can be expensive and complex especially for SMEs, but with independence we could do so much more. We would have the opportunity to work with the business community and our universities to introduce a modernised and more cost effective system to help encourage innovation and commercialisation in Scotland which played to the strengths of businesses and our Universities. This would be of benefit not just to large firms, but also small firms and those looking to embark on a business venture for the first time.

We’d also have an opportunity to take a global lead by building on our successful commercial court system, which would be attractive to Scottish business and, indeed others, from around the world. Our expertise in both Scots and English law and our Scottish Arbitration Centre are key strengths that would support a centre for international arbitration in areas such as IP and Patent litigation.

A key theme throughout my remarks this evening has been the importance of Scotland’s links with the international community in building success.

While we see the challenges that this presents in the form of our trade with the Euro Area, with overall Global trade growing on average by over 5% per annum between 1991 and 2011, internationalisation offers Scottish businesses fantastic opportunities to expand into new markets and take advantage of developments in new technology. Scotland’s brand and Team Scotland are already hard at work.

However Scotland is often one step removed from that international market and the international organisations that influence business life.

A regular comment I receive from businesses is their frustration at being forced to be directed through London to connect with Europe and beyond.

Control of Air Passenger Duty would enable us to grow air links between Scotland and major international business hubs.

While Independence would provide Scotland with a seat at key international decision making meetings.

With many important aspects of regulation, competition law and environmental policies now being driven by EU legislation, only as a Member State in our own right would we be able to ensure that Scottish interests were fully represented and taken into account.

Furthermore, as we prepare to embark on a consultation on better regulation in Scotland, with independence we would not only be better able to shape the design of regulation in the first place but also be better able to decide on the most appropriate way to implement European legislation - for example, by involving Scottish business on how any changes could be taken forward most efficiently.

One only needs to look at the substantial international interest there has been in developments since the turn of the year to see that the eyes of the world are on Scotland.

It will be of benefit to all of us and to our country as a whole if observers see this confident, can do, nation seizing the opportunities available to us, standing on the world stage and marketing our nation as a location for investment and business growth

In addition to having control of the key job creating levers, an independent Scotland will have more opportunities to determine the way in which the government interacts with business and sets the overall conditions for growth to flourish.

We already benefit from an open, honest and constructive relationship between the public sector in Scotland and the business, third sector and academic communities – something that is a major strength and I believe sets us apart from other parts of the UK.

With independence we could extend this to all aspects of economic and business life.

For example, having a clear set of principles which govern the way decisions on taxation are made in Scotland is crucial if businesses are to have confidence in the taxation regime they operate within.

As I set out to Parliament last week my vision is for decisions over taxation to be founded on four basic principles:
1. proportionality
2. efficiency
3. convenience
4. certainty

and to which I have added supporting sustainable economic growth.

I am clear that not only will independence enable Scotland to tailor the tax regime to meet Scottish needs, but that it will also ensure that the process with which these decisions are made meet the legitimate expectations of Scottish businesses.

A more flexible government means that tax and economic policy can be more dynamic and responsive to changing economic conditions.

To give you just one example, since 2008 we have lobbied the UK to use some of the revenues from high oil prices to lower fuel duty in our rural communities – where the price of fuel had become a real barrier to business.

For the first two years, the previous UK Government refused to support such a measure, and while the Coalition Government ultimately agreed with us, it took a further two years before even a very limited initiative was finally implemented.

So despite being revenue neutral and supported by communities across Scotland, nearly 4 years passed before this issue was even partially resolved.

The very fact that we are smaller means that we can be more flexible and responsive to the needs and demands of the business community.

Too often policymaking can become too far detached from reality and the situation on the ground.

The bogged down bureaucracy, the challenges of finding finance and the naysayers and doom mongers who simply say you can’t do that risk holding us back.

On my visit to E-Spark last week I saw the energy and enthusiasm of our young entrepreneurs being fostered by those who have seen it, done it, and who wear their scars and their stripes with pride. There was certainly no one there who talked business down.

The culture of business we can build in an independent Scotland with a ‘can do’ attitude, taking decisions in Scotland, in the interests of Scotland, will create a better business culture in Scotland.

Scottish businesses have a good track record in this regard – whether that be through supporting apprenticeships and youth employment or investing in the communities in which they are based and the cultural activities of our nation. When it comes to alternative forms of business, the Social Enterprise UK conference, in Glasgow earlier this year heard Scotland described as the best place in the world to run a social enterprise. That is an attitude that if properly captured can deliver not just more profit for business but profit for the country as a whole.

With independence we can take the ‘can do’ attitude I have sought to demonstrate in government with the limited powers at our disposal to the next level. We would bring all the organisations, the responsibilities and the powers available together under that ‘can do’ banner to embed enterprise, innovation, responsibility and opportunity in our government and our society.

Last week at the Business in the Parliament Conference, Sir Tom Hunter described Scotland as a “small and nimble speedboat against the super tankers of India and China”. It is my view that with the full responsibility of independence we can turbo charge that speedboat.

Over the next two years as we look toward the referendum. We must consider what will be the best arrangements for Scotland.

That is precisely why we will be taking forward a series of engagements over the coming months with business in Scotland to explore what opportunities would be available to enhance sustainable economic growth under independence and what challenges we will need to address.

This is your opportunity to shape Scotland’s future.

We will publish a series of papers the first of which will be released over the summer, to help inform the debate.

Our plans for the referendum will give the people of Scotland the opportunity to make a clear and informed decision on our constitutional future.

Independence will enable us to utilise all the economic levers to provide the stable and supportive environment Scottish businesses demand.

That is the exciting and energising prospect that lies ahead. It is for the people of Scotland to decide if they want to take that course.