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Foreword
I am delighted to introduce the Scottish Government's response to the Third Annual Report of the Scottish Council of Economic Advisers.
The Annual Report is welcomed as a very valuable piece of work that addresses important aspects of the Government Economic Strategy including: the Government's Purpose targets; key sectors of the Scottish economy; the important role of a good planning system; employment, skills and education; and the pressing need for the Scottish Parliament to possess increased tax and borrowing powers.
It is important that this government carefully considers the Council's 18 recommendations and provides a detailed response to each. To realise the vision set out in the Government Economic Strategy, we need to prioritise action that in the short-term hastens economic recovery and in the longer-term ensures that Scotlandemerges in a stronger and more competitive position in the global marketplace.
This paper sets out the Scottish Government's detailed response to each of the Council's recommendations. We have responded positively and with firm commitments to the majority of the recommendations made by the Council.Actions are already under way to implement some of them.
I would like to thank the Council for the tremendous amount of work it has undertaken over the last three years. I have been very impressed by the level of personal commitment, time and energy that has been given by Council members over the course of this Parliament to understand and tackle the economic challenges that Scotlandfaces.
It is clear from this response how seriously the Scottish Government has taken the recommendations presented in the Council's Third Annual Report. The Council's Annual Reports have been instrumental in helping us deliver the targets of our Economic Strategy and ultimately the Purpose of this Government - a more successful Scotland, with opportunities for all to flourish, through increasing sustainable economic growth.
Alongside the Government's response to the Third Annual Report, I am also today publishing a report on the progress that has been made in implementing the recommendations from the Council's Second Annual Report.
Rt Hon Alex Salmond MSP
First Minister of Scotland
Key Sectors - Financial and Business Services: Banking
Recommendation 1: The Council recommends that the Scottish Government asks the OFT to review competition in the Scottish banking market.
Scottish Government Response: Accept
On 2 June 2010 the Scottish Parliament debated the Enterprise, Energy and Tourism Committee's report of its inquiry into banking and concluded that the Scottish Government should write to the OFT, urging it commit to a formal investigation into competition in the banking sector in Scotland. Jim Mather MSP Minister for Enterprise, Energy and Tourism, did so on 15 June 2010.
The OFT response suggested that the Scottish Government should contact the Independent Commission on Banking (ICB), which is to consider wider competition issues, and advised that any additional investigation by the OFT at this time would now only add unnecessary confusion. The ICB published its Issues Paper and Call for Evidence on 24 September 2010 and the Scottish Government, including input from the Financial Services Advisory Board (FiSAB) through the FiSAB Banking Sub- Group, provided a response to the ICB on 17 November 2010.
In its response the Scottish Government made clear that a lack of data in the UK at individual country level means that it is constrained in its ability to provide the evidence required and therefore called on the ICB to ensure that data on Personal Current Accounts, mortgage lending to households and lending to SMEs, is collated at individual country level in the UK, including for Scotland. The Scottish Government also called on the ICB to ensure that conclusions from this exercise, and each of the leading reform options identified for further consultation in spring 2011, include an assessment of the impact on Scotland's banking sector and wider economy. The Scottish Government now awaits the ICB's options paper - due in Spring 2011 - and will provide a formal response to that paper.
Recommendation 2: The Council recommends that the Scottish Government seeks, through the outcome of such an investigation and other ways, to secure strong head office presences in Scotland in the banking industry.
Scottish Government Response: Accept
Scotland has always positioned itself as a low risk, lower cost location, where companies can take advantage of the highly skilled population and the existing infrastructure and assistance available to achieve operational cost efficiencies and savings. This makes Scotland a location of choice for any financial services company wishing to expand its operations here. By utilising the experience and track record of Scottish Development International (SDI) in promoting Scotland as a key financial centre, the Scottish Government is working hard to ensure that key messages about the overall strength in Scottish Financial Services are heard. Through its global offices, SDI delivers a clear and co-ordinated message to our key target audience. SDI will continue to lead SG efforts in building partnerships with international financial centres.
The Scottish Government will maintain its support for these efforts by ensuring Scotland continues to offer a flexible, open and transparent place to do business. It will also continue to work with the financial services industry to ensure full understanding of the needs of that industry, including of the banking sector through FiSAB and the Financial Services Skills Gateway.
The Scottish Government will continue to liaise closely with the UK Government to ensure it is fully aware of developments, e.g. in terms of the divestments to be made by Lloyds Banking Group (to seek to persuade those seeking to purchase those assets to establish the HQ of any new bank in Scotland). It will also continue to work with those new entrants, for example Tesco Bank and Virgin, which are headquartered in Scotland and which have aspirations to expand their operations and products to include mortgage lending and business banking which will facilitate the need to create further HQ functions in Scotland.
Recommendation 3:The Council recommends that the Scottish Government seeks, by influencing the policies of the Westminster Government and to the extent possible, using the pressures and powers available to the Scottish Government, to secure an increase in trading with, and in competition for, the supply of banking services to SMEs in Scotland.
Scottish Government Response: Accept
The activities outlined in response to recommendation 2 will also contribute to the Scottish Government's response to recommendation 3 as we seek to increase the number of banks in Scotland which wish to serve the SME market.
In addition, the Scottish Government will continue to undertake its survey of SMEs, to report on the issue of Access to Finance for SMEs in Scotland, engaging with the banking sector throughout the process, in order to continue to develop our own policies and influence those of the UK Government in this area.
The Scottish Government will continue to work with the financial services industry, including the British Banking Association-led Business Finance Taskforce, ensuring that businesses in Scotland benefit fully from all policies and measures introduced to help improve banking services to SMEs.
In addition, the Scottish Investment Bank (SIB) will continue to support the early stage risk capital market through the operation of equity investment products. The Scottish Government has also announced the appointment of fund managers to deliver a new £55m Scottish Loan Fund supporting established growth and exporting companies. The use of professional fund managers will ensure that the Loan Fund is run on sound commercial principles, maximising the potential returns to the Scottish economy. The SIB will continue to work closely with the private sector in responding to areas of market failure, where the banks are not meeting the needs of established SMEs and those with growth potential, by working at a Scottish, UK and European level to consider new interventions to address established failures and gaps. Any response to the market failure or gap may not necessarily be funded by the public sector but could include exploring innovative ways to bring more private sector capital to the Scottish SME funding market."
Key Sectors - Life Sciences
Recommendation 4:The Council recommends that the Scottish Government encourages a shift to life sciences sub-sectors with potentially higher productivity - possibly the agriculture, environment and veterinary, diagnostics, or industrial biotech (bio-manufacturing) subsectors - and re-evaluates the priorities for diagnostic, testing and precision activities; and especially stratified or personalised medicine and the associated bio-informatics databases.
Scottish Government Response: Accept in part
The Scottish Government agrees that there would be advantage in focusing on specific sub-sectors of life sciences with high productivity potential. The ongoing review of the Scottish Life Sciences Strategy by the Life Sciences Advisory Board (LiSAB) highlights those areas where existing Scottish strengths (academic and commercial) are aligned with near-term, global market opportunities (both current and emerging) to optimise the impact on the Scottish economy; and emphasises the need to focus more on these high productivity sub-sectors. It recommends that priority be given to support current areas of strength, such as clinical/translational medicine and regenerative medicine and recognises other significant areas of Scottish business strength including Medtech (including Diagnostics) and Pharma Services. These subsectors contribute more than half of GVA of the sector and offer significant global opportunities for growth.
This industry-led review concludes that there should be continued focus on these areas, with a view to realising the economic impact of the investments made to date. It will also recommend that further investigation takes place into how Scotland can exploit strengths and optimise impact in areas such as assisted living, stratified medicine, wellness, and sustainability.
The report mentions the high productivity of the agricultural and veterinary subsector and suggests prioritising investment into this part of the life sciences sector. Undoubtedly Scottish institutions conduct excellent agricultural and veterinary research, and its subsequent translation into commercial activity and company growth has thus far been limited. There is therefore scope to develop this and the opportunities will be looked at carefully.
Recommendation 5: The Council recommends that the Scottish Government improves the financing of the trials, testing and development phase of innovations through any of the methods suggested in paragraph 3.37.
Scottish Government Response: Accept in part
Life sciences are supported financially by the Scottish Government and its agencies through a range of measures including R&D Grants, Seed funding, Scottish Venture Fund (SVF), Scottish Co-Investment Fund (SCF), and Regional Selective Assistance. For example, in 2009-10, Scottish Enterprise invested, through its equity schemes, nearly £8 million in life sciences (24% of all its risk capital activity for 2009/10), with a total deal value of £21 million in this sector.
In relation to the financing of trials and the development of innovations, the Scottish Government recognises the benefits of accelerating this process, thereby making Scotland an even more attractive place in which to conduct research. Through the Scottish Academic Health Sciences Collaboration and NHS Research Scotland, it is working with both the commercial and public sectors to utilise our research strengths and enhance Scotland's competitiveness in areas such as stratified medicine. The successful arrangements through NHS Research Scotland to speed up approval of multi-centre clinical trials in Scotland are an important demonstration of NHS commitment to minimise bureaucracy and make its offering more customer focused. However, in the short to medium term, the Scottish Government considers that regulatory requirements governing clinical trials would make it difficult to achieve a significant shortening of trial periods and make therapeutic innovation more attractive to funders.
While private finance can be secured for most stages of clinical trials, this can occasionally be difficult. The Scottish Government therefore agrees that more needs to be done to attract further financing. Activity under consideration includes:
ensuring that support is prioritised towards areas of world-class capability in which Scotland has real strengths;
attraction to Scotland of more life sciences funders with access to larger funds; and
exploring risk sharing and developing innovative models between the public sector and private companies to increase Scotland's competitiveness as a location for clinical trials.
The Scottish Government has provided investment and support over the past four years to initiate and develop the use of tele-healthcare technologies within the health and social care service sector. To move effectively to the next phase of development, there is an acknowledged requirement to work in partnership with others to secure additional investment opportunities in the UK and beyond. Positive discussions are progressing with the Technology Strategy Board on funding under its upcoming DALLAS competition (Demonstrators of Assisted Living Lifestyles at Scale). Other investment potential is being explored via the proposals for a European Innovation Partnership on Active and Healthy Ageing.
Recommendation 6: The Council recommends that the Scottish Government finds ways to encourage interactions between key sectors, e.g. life sciences and digital or IT, and matching of intellectual property.
Scottish Government Response: Accept
The Scottish Government and its agencies support Industry Advisory Groups (IAGs) which cover the key and growth sectors of the economy.Work is under way to improve linkages and opportunities across IAGs and their respective sectors.Indeed the Technology Advisory Group is made up of representation from all the key sectors, in recognition of the horizontal underpinning of technology to wider sectoral growth. A new IAG has now been established to support tele-healthcare development in Scotland with joint sponsorship from SE, HIE, SG and the Scottish Centre for Telehealth/NHS24.Significant global international companies and SME interest in membership have already been attracted.
The Life Sciences Scotland 2011 strategy willrecommend further investigation into the exploitation by Scotland of strengths and opportunities in areas such as assisted living, stratified medicine, wellness, and sustainability. Emerging cross-sectoral opportunities are also to be considered in collaboration with the corresponding sectors: tele-healthcare (enabling technology and digital media); biofuels (energy); nutraceuticals (food and drink) and industrial biotechnology (chemicals).
Recommendation 7: The Council recommends that the Scottish Government considers changes in public procurement to favour new technologies and offer the possibility of an early order rather than a grant or subsidy.
Scottish Government Response: Accept
This issue has recently been considered by the Life Sciences Advisory Board (LiSAB), which believes that R&D grants to support research and development are needed as well as subsequent NHS orders.
LiSAB recognises that there needs to be greater alignment between life sciences R&D support from Scottish Enterprise, the Scottish Government and NHS procurement.It has driven the development of a road map to help medical technology companies obtain advice on product development from NHS Scotland experts, and to better understand the NHS procurement process in Scotland. The aim is to use NHS procurement knowledge to drive product innovation, as well as to ensure the development of high quality products which meet NHS needs. The objective is to encourage more product testing in Scotland, thereby increasing economic activity. Another area being explored is the use of the Technology Strategy Board Small Business Research Initiative to develop novel procurement solutions in the NHS.
Fiscal Responsibility
Recommendation 8: The Council recommends that the Scottish Government seeks to obtain the tax powers outlined above, in order to be in a position to influence the rate of economic growth and employment.
Scottish Government Response: Accept
The Scottish Government firmly believes that for Scotland to achieve its full economic potential, it must have control of the economic levers of an independent country.
The Scottish Government has set out the rationale for extending the Scottish Parliament's tax competencies in the National Conversation publication Fiscal Autonomy in Scotland: the case for change and options for reform and in the November 2009 White Paper Your Scotland Your Voice. Both reports highlight the opportunities that could arise from greater fiscal responsibility to increase the rate of sustainable economic growth in Scotland.
The rigorous analysis presented by the Council provides further insight into the importance of fiscal reform and the opportunities that it provides.
Recommendation 9: The Council recommends that the Scottish Government engages the UK Government in negotiations to make the necessary institutional changes for this to be possible.
Scottish Government Response: Accept
Since 2007, and throughout the National Conversation, the Scottish Government has led the debate on the options for fiscal and financial reform.
The Scottish Government has also engaged constructively with the recommendations of the Calman Commission, urging early action for proposals that would benefit Scotland but raising serious questions about others, particularly on finance.
Since the summer of 2010, the Scottish Government has met with the UK Government on a regular basis to discuss how the Calman recommendations could be taken forward in the autumn Scotland Bill. As a result of these discussions, some concerns have been addressed. However, others - including the risks of deflationary bias, the lack of any meaningful economic levers, the inadequacy of mechanisms to address volatility in budgets and the lack of transparency and accountability inherent in the system - have not been fully addressed. As the Council has identified, these weaknesses have the potential to harm Scotland's public finances and economy.
The Scottish Government is committed to continuing to engage with the UK Government to take forward an improved system of fiscal reform and is also committed to supporting the work of the Scotland Bill Committee which is currently scrutinising the UK Government's Scotland Bill in the Scottish Parliament.
Recommendation 10: The Council recommends that the Scottish Government gives priority to obtaining the power to borrow; then to obtaining power over taxes that affect the rate of return on labour (national insurance, business taxes, R&D credits).
Scottish Government Response: Accept
The UK Government's Scotland Bill intends to grant borrowing powers to Scottish Ministers for the purpose of capital investment, up to a total value of around £2.2 billion. The Scottish Government welcomes the principle of borrowing powers, however we have a number of concerns with the limitations of the specific proposal. These include the timing of implementation, the scale of borrowing permitted and the flexibility of the provisions.
The Scottish Government is also concerned that the Bill in its present form does not grant it revenue borrowing powers sufficient to enable an effective response to material shortfalls in tax receipts in comparison with the UK Government's forecasts, or to even enable it to borrow to maintain Scottish spending during times when tax revenues were forecast to decline temporarily. The powers as proposed would oblige the Scottish Government to reduce spending were there to be an anticipated cyclical reduction in Scottish income tax receipts. This could deepen recessionary pressures in future.
The Scotland Bill will increase the Scottish Parliament's responsibilities over income tax, Stamp Duty Land Tax and Landfill Tax. However, key economic levers - including the ability to influence corporation tax, North Sea revenues, fuel duty, excise duties and other environmental and business taxation - will remain reserved.
The Scottish Government acknowledges that acquiring responsibility for a broader range of taxes is crucial to driving forward sustainable economic growth in Scotland and will therefore continue to press for a framework of full fiscal responsibility.
Employment, Skills and Education
Recommendation 11: The Council recommends that the Scottish Government more closely coordinates the arms of the Scottish and UK Governments with responsibility for employment and skills issues. In particular, the Council believes that closer alignment and coordination between Jobcentre Plus, careers services and Skills Development Scotland would bring about a more effective approach to improving labour market participation in Scotland. So too would greater Scottish autonomy in setting benefits policy. The Council believes that Jobcentre Plus employability services should be devolved to the Scottish Government and that further consideration is given to bringing benefits and skills policy together within Scotland.
Scottish Government Response: Accept
The Scottish Government has close and effective relationships with Jobcentre Plus in Scotland on a day-to-day operational level. Through the integration of employability and skills we have brought together the services of Jobcentre Plus in Scotland and Skills Development Scotland. This aims to provide a better integrated one-stop approach for those requiring support and advice to secure and sustain employment in Scotland. We recognise that closer integration is still possible, and we have agreed with the UK Government to consider further opportunities for partnership working and co-location.
The Scottish Government published Employability and Skills: Taking forward our national conversation in November 2009. This set out the case for further devolution in this area including that of Jobcentre Plus employability services in Scotland. The Scottish Government believe that independence is the best way forward and will provide the freedom and flexibility to increase sustainable economic growth, tackle poverty and income inequality, and help those who want to work.
We continue to press the case for further devolution with new UK Ministers.
Recommendation 12: The Council recommends that the Scottish Government puts greater effort into building local consortia consisting of representatives from the DWP, Jobcentre Plus, local government, NHS, Employers Federation, Skills Development Scotland, Chambers of Commerce and other key interested parties. The Council is convinced that the local partnership model is the most efficient way to design and manage the delivery of services to move benefit recipients into work.
Scottish Government Response: Accept
There are active employability partnerships in all 32 local authorities. We support these partnerships through our capacity building work and the web based employability learning network. We recognise areas where representation could be stronger, including the health sector and local employers.
There is an active employer engagement plan which seeks to improve local dialogue between the Scottish Government and employers and to ensure a "joined up offer" for employers. On health, we continue to build capacity amongst front line workers and support local partnerships to improve services for those facing health-related barriers to work.
We continue to fund innovation in service planning and delivery including data sharing, joint referral and assessment and co-location of services.
Recommendation 13: The Council recommends that the Scottish Government ensures training and educational institutions pay attention to the subsequent employability of their students. The Council urges the collection and publication of statistics on students' success in finding employment after graduation. Good quality careers advice for university graduates, coupled with short courses to enhance job-seeking and labour market skills, are likely to be cost-effective ways to tackle graduate unemployment.
Scottish Government Response: Accept
The Higher Education Statistics Agency already publishes data on an annual basis about the destinations of leavers from higher education. Moreover, the percentage of Scottish domiciled graduates from Scottish Higher Education Institutions in positive destinations is also monitored as part of the Scottish Government's National Performance Framework.
The Scottish Government is supporting the Association of Graduate Careers Advisory Services (AGCAS) Scotland to help improve the employability of graduates and ensure final year students and unemployed graduates receive appropriate advice and support. This includes supporting the new Talent Scotland - Graduate Placement Programme - that has been developed by Scottish Enterprise and Highlands and Islands Enterprise with help from Skills Development Scotland, AGCAS and the Scottish Funding Council (SFC). Through its employability strategy, Learning to Work 2, the SFC is also supporting four projects to deliver 2,550 work placements for college and university students, to help enhance their employability skills during their studies.
Recommendation 14: The Council recommends that the Scottish Government undertakes development of metrics to measure teacher quality, in collaboration with professionals, in order to improve the quality of education in Scottish schools in cost-effective ways. The quality of teachers must be measured, good teachers must be recognised and rewarded, and ineffective teachers must leave the profession.
Scottish Government Response: Accept in part
The Scottish Government agree that raising the quality of learning and teaching in our schools is crucial as we strive to build on current strengths in our education system.
The Scottish Government's response to the Second Annual Report made reference to the commissioning of a root and branch review of teacher education and development. The report of the Donaldson Review of Teacher Education in Scotland, Teaching Scotland's Future, was published on 13 January 2011. It contains a number of recommendations that are of direct relevance to teacher quality. The Scottish Government aims to respond to it within two months.
The Scottish Government introduced the General Teaching Council for Scotland (GTCS) Order before the Scottish Parliament in February 2011. If this is approved, the Scottish Government will establish the GTCS as an independent, profession-led regulatory body by April 2012. An important element of the legislation is the duty that will be placed on the GTCS to introduce a scheme of teacher re-accreditation with a view to ensuring that all teachers maintain appropriate standards of competence.
Recommendation 15: The Council recommends that the Scottish Government gives fresh thought to involving university students and their families directly in carrying the costs of Higher Education, preferably through a system of deferred payments. The alternative, in an era of extreme pressure on public resources, is likely to be unsustainable financial pressures on Scotland's world-class universities.
Scottish Government Response: Accept in part
All matters relating to higher education funding are currently being debated in Scotland, in the context of the Green Paper Building a Smarter Future: Towards a Sustainable Scottish Solution for the Future of Higher Education, published on 16 December 2010. No ideas have been ruled out, with the exception of tuition fees. The Paper discusses the possibility of deferred payments helping to fund the cost of higher education though Ministers have said that this option remains their last resort.
At the same time, a short-life working group, run jointly by Scottish Government officials and Universities Scotland, will look at providing some technical advice on the size of any funding gap facing the sector and what contribution the options set out in the Green Paper may make in filling this gap. It will report to a higher education summit on 1 March 2011.
Recommendation 16: The Council recommends that the Scottish Government, given the international reputation of Scottish schools and universities, regards education at all three levels as part of the highly skilled services that Scotland markets to the global economy. The attraction of international students to Scotland, at every stage in their education, will raise the international profile and marketability of other sophisticated sectors of the Scottish economy.
Scottish Government Response: Accept
The Scottish Government works with schools, colleges, universities and other relevant partners to promote Scotland overseas as the place to live, work, study, and do business. This includes supporting Scotland's Saltire Scholarship Programme. Aligned to the Government Economic Strategy, the scholarships are targeted at the priority sectors of the creative industries, life sciences, technology, financial services and renewable and clean energy. Further, Building a Smarter Future, the Green Paper on the future of Scottish higher education, contains a number of proposals to strengthen further its international profile.
Planning
Recommendation 17: The Council recommends that the Scottish Government increases the pace of improvements in planning performance, particularly at the local authority level, through ensuring that there is a financial incentive for local authorities to commit to high quality developments. This could be achieved by rapid acceleration and development of the incentivisation models currently being piloted.
Scottish Government Response: Accept
A number of actions are underway to address this recommendation. The Scottish Government, agencies, planning authorities, COSLA and the private sector have worked together to implement the commitments made in Delivering Planning Reform, which aim to increase co-operation between stakeholders and support reform of the planning service in Scotland. The government is currently working with COSLA, local authority chief executives and heads of planning to address issues around resourcing the planning service alongside performance improvement. The Scottish Government has also made it clear that any future increase in planning application fees must be justified by a demonstrable improvement in performance.
There has been significant progress in the development and application of Tax Increment Finance (TIF) in Scotland since the Scottish Government last reported to the Council of Economic Advisers, with the approval of the use of TIF for the Edinburgh Waterfront development. Glasgow and North Lanarkshire Councils, in conjunction with Scottish Futures Trust, have advanced business cases for their respective TIF proposals: Buchanan Galleries and Ravenscraig. Both Councils are expected to submit these for Ministerial approval early in 2011, with Glasgow proposing to commence work in 2011-12. Work is also under way to introduce a Business Rates Incentivisation Scheme (BRIS) in 2011, which would allow local authorities to retain a proportion of business rates income over and above a target level of what they would otherwise be expected to collect.
However, these incentives do not mean delivering developments at any cost. The government recognises - in the words of the First Annual Report of the Council - that "the ultimate test of an effective planning system is the maintenance and creation of places where people want to be." The ongoing work in relation to the Scottish Sustainable Communities Initiative,Designing Streets, rural house design and training in design support this aspiration for high quality developments.
Recommendation 18: The Council recommends that the Scottish Government continues to work to ensure that the planning system acts as an enabler to development and focuses on development delivery, where it is vital for local authorities, government, agencies and private sector to align activity.
Scottish Government Response: Accept
The government is continuing a programme of work to ensure that the planning system is proportionate, effective and efficient and delivers the right development in the right place. The National Planning Framework for Scotland 2 sets out the government's strategy for the long-term development of Scotland's towns, cities and rural areas.
The modernisation of the planning system is now moving from the development planning and development management phases to development delivery, ensuring that the changes made, support development on the ground. The Planning Reform agenda is also progressing and annual service improvement plans are being published by the Scottish Government, agencies and local authorities.
The Scottish Government considers that lasting change will only be achieved through public and private sectors working together and, on this basis, the Government is continuing to work with public and private sectors to align activity, including options for the funding of essential infrastructure, and brokering planning solutions.