Scottish Government

The Council of Economic Advisers has been created to advise the First Minister on how to increase Scotland's sustainable economic growth rate. The ninth meeting of the Council will take place on 11 June 2010.

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Introductions, Minutes and Actions

1. The Acting Chair welcomed all members of the Council to the eighth meeting.

2. The Acting Chair referred members to the minutes and matters arising from the seventh meeting. Council members indicated that they were content.

Government Response to the Council's Second Annual Report

3. The First Minister introduced the published response of the Government to the Second Annual Report and recorded his appreciation for members' valued contributions.

4. The Scottish Government accepted or accepted-in-part all but one of the Council's 17 recommendations. The exception related to the Council's recommendation to review the shape of the Government's population target.

5. Work had already commenced across government to take forward many of the Annual Report recommendations and two important aspects, around knowledge exchange and borrowing, would be addressed directly in the later sessions of the meeting.

6. The Cabinet Secretary for Finance & Sustainable Growth updated the Council on the recently announced Independent Budget Review that will consider the implications of expected reductions in public spending in the short and medium term. This development is relevant to the Council's recommendation to establish a fiscal policy commission to review the presentation of public finances and fiscal outlook in the context of potential greater fiscal autonomy.

7. The complete Government response to the Second Annual Report has been published on the Scottish Government website along with a progress report on the implementation of the recommendations contained in the Council's First Annual Report.

Update on the Scottish Economy

8. The Acting Chair invited Dr Andrew Goudie, the Government's Chief Economic Adviser, to provide an update on the Scottish economy.

9. Dr Goudie reviewed recent movements and trends in key official statistics and business surveys and provided an assessment of global developments and future prospects for the Scottish economy. The full presentation can be found here.

10. Dr Goudie's presentation indicated that:

• The Scottish economy has closely mirrored the performance of the UK economy during the economic downturn.
• Latest GDP data for Scotland showed a further decline in Q3 2009, but the rate of decrease had eased substantially compared with the previous quarter - very much in line with the change in UK GDP over the same period.
• While services output declined at a faster rate in Scotland than the UK in the year to Q3 2009, output in the production, construction and basic industries was less severely impacted in Scotland.
• Scottish labour market performance remains comparatively good despite continuing increases in unemployment. Employment had risen by a modest amount in the September-November period, but a further deterioration in coming months was to be anticipated.
• GDP statistics indicate that the global economic recovery is proving to be much less synchronised and more varied in strength than the move into recession in 2008.
• IMF forecasts suggest that the major emerging and developing economies will experience the fastest rates of growth in 2010, followed by the economies of North America. In contrast, the European economies are expected to grow by an average of only 1.5 per cent this year.
• World trade volumes, which fell by 6 per cent in 2006, are expected to rise by 10 per cent this year. Against this background, net trade is predicted to make a relatively strong contribution to UK and Scottish GDP growth in 2011 while all the components of domestic demand remain weak.
• Both the IMF and the Bank of England predict a modest economic recovery for the UK in 2010, a path which the Scottish economy can be expected to track fairly closely.
• The near-term economic outlook in the UK and Scotland is clouded by several key uncertainties, principally:

11. Discussion on these and other issues followed, including the expected future comparative weakness of the EU economies, trends in the availability of business credit within Scotland and recent positive developments in the energy sector.

Energy - Recent Developments

12. The Cabinet Secretary for Finance & Sustainable Growth updated the Council on recent developments in the Scottish energy sector.

13. Since the Council last met in September, the Scottish Government has approved the upgrade of the Beauly-Denny power line to boost grid capacity and unlock Scotland's onshore and offshore renewables potential. This upgrade - the single most significant grid infrastructure project in a generation - will provide capacity to deliver over 5 Gigawatts (GW) of electricity from the north of Scotland to the Central Belt.

14. Further developments concerning offshore grid infrastructure were also described. Ministers of the North Sea countries have signed a declaration to cooperate on the development of the first offshore grid in the North Sea and Irish Sea; and, in January, consultants were appointed to examine the feasibility of developing an offshore grid in the Irish Sea - the ISLES project.

15. Council members also heard about progress being made to improve arrangements for access and use of the electricity transmission network. On 18 January, Energy Minister Jim Mather hosted a discussion with OFGEM, National Grid and Scottish energy interests on the existing energy regulatory framework and the application of locational charging. National Grid have since expressed the view that the current transmission charging mechanism based on peak demand methodology, may no longer be appropriate in a world of high wind penetration.

16. All these significant developments had occurred since publication of Scotland's Generation Advantage last December, which confirmed Scotland's comparative advantage in renewable energy and the vast potential to provide permanent long-term storage of carbon dioxide emissions.

Knowledge Exchange

17. The Council's Second Annual Report recommended action to support greater cooperation between academics and businesses by promoting systems for sharing information and ideas.

18. Expertise within the Council spans the worlds of business and academia and members will continue to assist the Government to address this recommendation. A Council member has already begun to consider the value of existing systems that facilitate knowledge exchange between academia and business in Scotland, including the Interface system.

19. This preliminary work suggests that Interface is a significant step forward in terms of linking universities with businesses but that there appears to be scope to improve matters further given the scale of the challenge to harness Scotland's research base and boost business innovation.

20. Ahead of the next Council meeting in June, further work would be undertaken to consider issues around business awareness and marketing of existing systems, incentives for universities to publicise their research and the potential advantages of the use of 'smart' database technologies.

Borrowing

The Cabinet Secretary for Finance & Sustainable Growth presented the Government's thinking on practical steps that could be taken to progress the recommendations on borrowing outlined in the Council's Second Annual Report.

21. Building on earlier conversations about the clear advantages for the Scottish Parliament of having devolved borrowing powers to help finance long-term capital projects, the Cabinet Secretary highlighted four key issues that summarise the essential considerations for the Government around borrowing: (i) transparency, (ii) affordability, (iii) sustainability, and (iv) value for money.

22. Existing borrowing secured through the PFI route manifestly fails the first test of transparency and this in turn gives rise to questions about affordability and sustainability. The Government is currently examining all existing PFI schemes to better understand and project the exact scale and timing of the related financial commitments.

23. At present, around two-and-a-half percent of the Government's total revenue budget is devoted to meeting repayments linked to PFI and Network Rail projects. The Cabinet Secretary indicated that this proportion is expected to increase in future years with necessary implications for the funding of other spending requirements.

24. In a scenario where the powers of the Scottish Parliament have been increased, it was suggested that it ought to be possible for the Scottish Government to borrow at close to market rates of interest. The Council also expressed the view that borrowing from the market, as well as through the Public Works Loan Board (whichever is cheaper), might be the most advantageous option.

25. As indicated in its response to the Second Annual Report recommendation, the Scottish Government supports the establishment of a fiscal policy commission to perform a regulatory or supervisory role in the context of increased fiscal autonomy.

26. The Council suggested that lessons might be learned from the operation of fiscal policy commissions elsewhere. The Cabinet Secretary committed to continue to keep the Council updated on progress and said that he would seek further advice from the Council when needed.

Work Programme for 2010

27. The work programme for the remainder of the year was discussed with a view to producing the Council's Third Annual Report in December 2010.

Next Meeting

28. The Acting Chair noted that the next meeting of the Council will take place in June 2010.

The following members of the Council were present:

First Minister
Lord Robert Smith ( Acting Chairman)
Mr Crawford Beveridge
Ms Frances Cairncross
Professor Andrew Hughes Hallett
Professor John Kay
Professor Alex Kemp
Sir James Mirrlees
Mr Jim McColl
Sir George Mathewson (for part of the discussions)

Apologies were received from:

Professor Finn Kydland
Professor Frances Ruane

Also present:

John Swinney, Cabinet Secretary for Finance and Sustainable Growth
Dr Andrew Goudie, Chief Economic Adviser
David Bishop
Jennifer Erickson
Simon Forrest
Lucy Proud
Dermot Rhatigan