A look ahead to next week

Next week, we’ll be publishing our latest Fraser of Allander Commentary, in partnership with Deloitte.

It promises to be a bumper edition. So much so, that we’ve decided to stagger our articles over the course of the week – so that there is no excuse not to read all of them and catch-up on our podcasts and webinars!

There are some great articles, including a superb reflections piece on Scottish public policy and how it has changed over the years (and what, frustratingly, hasn’t changed) from the insightful Caroline Gardner, Scotland’s retiring Auditor General.

There are articles on the fiscal implications of COVID-19, discussions around poverty targets, inequalities and education outcomes, and our usual overview of the outlook for the Scottish economy.

We also have contributions from around a dozen leading economists in Scotland, business leaders and poverty campaigners who have all kindly written their thoughts on the outlook and where the focus of policy should be in the recovery.

The main focus of our assessment of the outlook – which we will be publishing on Wednesday – is the re-starting of our economy post lockdown.

In recent days, much of the focus has been on the implications and timing of the progress through the government’s route-map.

What is clear is that there is now a much greater differentiation between Scotland and England, with the easing of lockdown restrictions and the pace of re-mobilisation slower here than south of the border. But the ramifications of a second wave mean that there are economic as well as health costs with restarting too quickly. Time will tell who was right.

It is fair to say, however, that we have picked up some unease amongst many in the business community – and the businesses we speak to on a regular basis – about, not so much the pace of the easing of restrictions, but the government’s wider approach to the economy and its understanding of business priorities.

All eyes therefore, will be on the launch of the report of the Economic Recovery Group on Monday.

It is likely to be the first of many think-pieces from policymakers and their advisers across the UK on the priorities for recovery. There are increasing hints of a mini-UK Budget in July.

So, what do we make of this debate in Scotland?

So far, the discussions have been concentrated around a number of themes – ranging from the specific interests of some key sectors (such as tourism, entertainment and bars/restaurants), the limited borrowing powers of the Scottish Government, the need for a further fiscal stimulus (or ‘greater fiscal flexibility’) to support the recovery, and the importance of ‘building back better’. And, if press reports are to be believed, expect to hear more on Monday about proposals that would seek to see the public sector taking a greater equity interest in private sector companies (it’s no longer just shipyards, airports, or banks).

As is the norm, our politicians have been calling on each other, and governments of different political affiliations, to ‘do more’.

The UK Government tell the Scottish Government to use the powers they have. The Scottish Government call on the UK Government to give it more money and/or more powers. Local Government is left at the end, with little money and little autonomy.

That part of the debate risks becoming a distraction. And it shouldn’t be about who does what, but doing the right thing.

The policy debate is, of course, complex. Throw in an elaborate division of powers across reserved, devolved and local areas (not to mention some interesting constitutional debates) and it gets even more difficult to track.

Here we touch on three key themes.

The immediate priority

Before embarking upon a discussion around medium term policy objectives, we cannot lose sight of the urgency of the situation now:

• Firstly, it is crucially important to avoid a second wave of infections. The need for an effective testing and tracking regime at scale is urgent. The fact that it is still not ready is a concern for the economy as well as public health.
• Secondly, government needs to develop an effective plan for the safe return of schools to let parents return to work which integrates both schooling priorities with the working patterns of parents/guardians. Failure to do so risks extending the economic crisis and widening inequalities.
• Thirdly, it is vital that policymakers get the timing of the lifting of financial support measures right and that this aligns with when restrictions are lifted. All the evidence points to many small businesses having few reserves to survive at reduced levels of demand. Lift support too early and/or delay the easing of restrictions too long, even by a matter of weeks, and the knock-on impacts across the economy will be severe.
• Finally, much will depend upon how consumers react to the easing of restrictions. Will it lead to a spike in demand as delayed spending comes back on stream, or will spending remain subdued if expectations remain fragile? Government has a role in building confidence amongst consumers and businesses – not just in terms of actual policies but clarity and consistency of message.

Of ongoing importance, is making sure that we protect the most vulnerable in society – and in particular, those at greatest risk from economic harm because of poverty, health or wider inequalities.

Responsibility for all these things is shared across all levels of government. We cannot stress how important it is, even before we think about the next stage of policy ideas, that we get these things right.

Of course, underpinning all of this is the need to keep public health considerations paramount. Premature unlocking of the economy could easily bring even greater damage in the longer term than a more considered health-driven remobilisation.

The need for a fiscal stimulus is clear – but on what?

Secondly, it is the case that a well-targeted stimulus will be required through the recovery phase. But we need to be clear about what for, and how it will be used.

There has been much discussion about how the Scottish Government is constrained in its ability to implement whatever fiscal stimulus it sees fit. This is true. But the Scottish Budget has been boosted by around £3.8 billion in 2020/21 from Barnett Consequentials stemming largely from business rates relief given to English businesses at the start of the crisis.

Therefore, whilst the Scottish Government hasn’t borrowed per se, the UK Government has effectively borrowed billions of pounds on its behalf. So far, the Scottish Government has chosen to spend such monies in largely the same way as the UK Government.

In total, adding in various job and business support schemes, the fiscal money that has gone into the Scottish economy is over 5% of Scottish GDP. Whilst this might not feel like a ‘stimulus’ – perhaps more an ‘insurance support package’ – it has increased the money in the bank accounts of businesses and their employees whilst the wider economy hibernates. Without this, there would be less cash and spending in the economy at the moment.

So, if there is to be a further injection of funding (and there should be) what should it do? And where should it be targeted?

Policymakers and politicians – on all sides of the political spectrum – need to avoid a scatter gun approach that aims to prioritise everything. There needs to be a clear strategic direction tied to the outcomes that government are trying to improve.

Likely candidates include employability and measures to tackle youth unemployment, be-spoke support for sectors and regions particularly badly impacted and the go-to policy in recessions (albeit with benefits that are often way below what is claimed) of accelerating capital projects.

Investing in policies that tackle some of the immediate wider implications of the crisis would make sense too, whether that be in digital training or support for town and city centres. Supporting the North East cope with the downturn in oil & gas, and transition to a broader centre of energy activity, would make sense too.

Might there be merit in an additional stimulus in Scotland?

Possibly, if the impact of the crisis is greater here.

But in this case, the current fiscal framework does constrain the Scottish Government in what it can do to stimulate the Scottish economy beyond UK-wide policy.

Of course, whilst the Scottish Government might not be able to borrow to add a further layer of demand through day to day spending, they can certainly re-prioritise spend within their Budget.

At the same time, this crisis isn’t just a demand shock. It’s a supply and financial shock too.

Shifting resources around to tackle these other causes of the crisis is equally important. For example, by putting more money into enterprise, skills, employability and local economic development. This isn’t easy, as it requires scaling back elsewhere, but in a Budget of £35 billion there surely is some room for manoeuvre.

It cannot be the case that everything that was deemed a priority pre-COVID carries the same weight as the urgent economic crisis?

For example, in recent weeks, there has been controversy around generous pay awards for civil servants. At a time of anticipated high unemployment for example, might civil servant pay restraint be worth considering, with the funds diverted to support employability programmes?

The government might also want to review areas where support has been cut back or cancelled, which would have a material impact upon outcomes.

In April for example, the government announced that the planned 2020 introduction of the Scottish Child Payment – widely heralded as a key step on efforts to reduce child poverty – had been put back into 2021 (the government’s annual report on efforts to reduce Child Poverty which was due out this month has too been postponed).

Good ideas are good ideas but……

Thirdly, it is clear that there will be many new novel ideas in the days and weeks to come about how policy could better support the economy.

As we pointed out last week, we’ve been having these debates in Scotland for the best part of 20 years – if not longer.

So new ideas are great, but many of them will have been discussed before. This isn’t a criticism, but a fact that apparently seems to bristle with people more than you might expect.

What is crucial is the evidence base and delivery plan backing up each policy suggestion. [NB: The government’s Export Strategy was a good example of a robust evidence base underpinning its decisions.] The last thing we need to do is to race headlong in to the next ‘great idea’, with little in the way of evidence, analysis and/or consideration of the market failure or delivery challenges associated with it.

At the same time, we need to avoid biasing our thinking that a new approach has to be the creation of a brand-new policy ideas or the creation of even more new institutions. It could simply be, invest more in existing economic infrastructure that works, provide more cash to local councils to support local economic development (which has been hollowed out due to central government budget cuts in recent years) or join-up different parts of the public sector to support the enterprise eco-system a bit more.

We also need to recognise that many policies don’t just bring benefits, but carry risks too. Extending the furlough scheme makes sense for many employed in sectors still under heavy restrictions. But it may lock-in people in to jobs that are simply not going to exist when restrictions are lifted at any future date (thus limiting their transition into new jobs).

Investing a public share in private sector companies can help support growth and provide greater resilience, but there is a long-list of failed investments over the years. Managing these sorts of investments is also not easy, particularly given often complex political and ethical considerations, and requires a particular (expensive) expertise and skill-set.

We already spend significantly above the UK average on economic development in Scotland – to the tune of around £100 per person.

Back in 2017, the First Minister argued that with investing more than £2 billion on skills and business support each year, the government was “determined to do is make the most of the money we already spend.” As we think about new policy, has anything changed prior to the crisis? And what’s the evidence to back that up?

Expect much of the policy debate in the coming weeks to be dominated about how we need to do ‘more’. More spending, more to support businesses and more to support workers and households.

This is entirely correct. But we also need to have a debate about what we are doing already and what we need to prioritise within existing budgets. New ideas also need to be within competence or at least not lead to protracted discussions between governments. Yes, there are important debates to be had about the constitution, but in the context of the immediate response to the crisis, these are for another day. Now is the time for bold policy ideas, certainly bolder than we have seen in the pre-COVID period. Fiddling around with minor variations in tax policies and/or spending lines won’t cut it.