New report from CBI Scotland reveals how unlocking regional productivity growth can bolster Scotland's economy.
28 November 2017
CBI Scotland submission ahead of the Scottish Budget 2018-19
Ahead of the forthcoming Scottish Budget, CBI Scotland has written to Finance Secretary Derek Mackay to outline its key priorities for business.
Derek Mackay MSP
Cabinet Secretary for Finance and the Constitution
I am writing to outline CBI Scotland’s priorities ahead of the Scottish Budget 2018-19. The CBI speaks for some 190,000 businesses operating across the country and is the UK’s leading business organisation. CBI members directly employ at least 500,000 people in Scotland, which represents a quarter of the private sector workforce, including companies headquartered here and with operations in Scotland.
As we’ve discussed before, now more than ever, business and investors need a clear signal from government that Scotland is an open, attractive destination for business with a stable and competitive system of tax and regulation. This, alongside long-term commitments to strengthening skills, infrastructure and innovation, can help provide the foundations we need to grow the economy, boost Scotland’s revenues and raise living standards across the board.
With economic growth still fragile and uncertainty weighing heavily on the outlook, this Budget comes at a critical time for the Scottish economy. The only sure way to raise living standards and provide sustainable public services is to solve Scotland’s productivity problem. Our submission focuses on four priority areas for the Scottish Government’s forthcoming Budget:
- Tax: policy must enhance the attractiveness of Scotland as a place to live and do business, not deter it
- Education and skills: ensure businesses can access the skills they need to grow
- Infrastructure: deliver an infrastructure pipeline that will improve connectivity and boost productivity for the whole country
- Innovation: maintain a relentless focus on making Scotland an innovation world leader
Only by driving private sector growth across Scotland can we start to close the productivity gap and generate the type of sustainable, inclusive growth needed to benefit the people of Scotland. CBI Scotland and our members look forward to working with you on the issues and recommendations outlined in the attached submission.
CBI Scotland Director
CBI Scotland submission ahead of the Scottish Budget 2018-19
The Scottish Government needs to get our economy in shape for the challenges ahead by demonstrating a commitment to a pro-enterprise environment and maintaining a relentless long-term focus on improving productivity.
The only sure way to raise living standards and provide sustainable public services is to improve productivity. This begins with a clear message that Scotland is a good place to do business with a stable and competitive system of tax and regulation, alongside long-term commitments to strengthening skills, infrastructure and innovation.
Creating the conditions in which businesses of all sizes and sectors can prosper is essential to boosting productivity and to generating the jobs and revenue needed to fund high-quality public services. At CBI Scotland, it is our purpose to help businesses create a more prosperous society for the benefit of all. The CBI’s members directly employ at least 500,000 people in Scotland, which represents a quarter of the private sector workforce. This includes companies headquartered in Scotland as well as those based in other parts of the UK that have operations and employ people in Scotland.
Against the backdrop of Brexit and the new revenue-raising powers of the Scottish Parliament, there has never been a more important time to focus on improving productivity across Scotland, which remains 16% below the G7 average. Productivity matters because higher productivity leads to more sustainable growth, better wages and ultimately higher living standards for people. That is why increasing productivity across all parts of the country should be the single biggest domestic priority and therefore should be at the heart of the Scottish Budget 2018-19.
In June this year, CBI Scotland published Pursuing Prosperity, which outlined the scale of the productivity challenge Scotland faces and identified the key drivers of regional productivity differences, with the most productive local authority areas in Scotland 50% more productive than the least. Only by driving private sector growth across Scotland can we start to close this gap and generate the type of sustainable, inclusive growth needed to benefit the people of Scotland. Below, we set out a range of areas where we believe the Scottish Government could use its forthcoming Budget to help achieve this ambition.
- Set out a tax roadmap that shows how new and existing tax powers and revenue will be used to support growth
- Ensure parity of income tax with rest of UK to support household spending and help businesses attract and retain talent
- Reduce the Large Business Supplement to 1.3 pence no later than April 2020 to make Scotland’s Business Rates regime more competitive
- Link inflation increases in Business Rates to CPI by April 2020 to help ease pressures on business
- Work with the UK Government to address the Highlands and Islands ADT exemption so that Scotland can benefit from a 50% reduction in the overall burden of ADT
With the outlook for the Scottish economy subdued and Brexit-related uncertainty constraining growth in business investment, it is more important than ever to provide a clear sense of direction for the Scottish economy and give confidence to businesses and investors developing their plans for the coming years. As a first step, the Scottish Government should publish a tax roadmap to set out how new and existing revenue-raising powers will be used to drive growth. This should be matched by a long-term vision for securing sustainable public finances.
While income tax will be the most significant source of funding for public services, it is also an important determinant of economic activity through its bearing on consumer spending. Faltering consumer and business confidence risks lowering living standards, therefore the Scottish Government must do all it can to generate confidence. CBI Scotland believes parity of income tax with rest of UK is the best way to support this.
Household spending has been particularly important in supporting domestic demand in the aftermath of the EU referendum, but over the course of 2017 it has become weak as inflation has risen. This has fed through to official data which shows the smallest contribution of household spending to Scottish economic growth since 2014 in Q1 2017. Inflation is now at 3% - a five year high - and continues to outpace wage growth which in turn has weighed on consumer spending. The CBI expects household spending to remain tepid in 2018, as real income growth remains soft, with its contribution to UK GDP expected to be lower (0.4ppts; 1.1pts in 2017), relative to the average since 2012 (1.4ppts). This aligns with the Fraser of Allander Institute’s expectation that the contribution of household spending to Scottish economic growth will fall back next year.
Income tax also plays an important role in attracting and retaining talent. The current ‘war for talent’ facing businesses means that the Scottish Government must keep income tax at competitive levels. Ensuring parity of income tax with rest of UK is the best approach. The need to attract talent into higher skilled roles is crucial to addressing Scotland’s productivity challenge. CBI research indicates that more than three-quarters (77%) of businesses in Scotland expect to increase their number of higher skilled roles in the coming years, but 59% aren’t confident about filling them. The Scottish Government cannot afford to create barriers to attracting and retaining talent, even in small numbers. Indeed, a Scottish Government paper indicated “given the high average tax liabilities of additional rate taxpayers, the overall change in revenue could be influenced by changes in the tax liabilities of a relatively low number of taxpayers” who often exhibit higher levels of labour mobility. Therefore on income tax, the Scottish Government should prioritise widening the tax base which will not only help address Scotland’s skills and demographic challenges but also help secure sustainable public finances in the long-term.
Non-domestic (business) rates on commercial property is another way businesses contribute to the public purse and to local services. It is also an important lever that government has to encourage productivity enhancing investments by businesses. Maximising business investment and presence in Scotland allows businesses to do what they do best – create more jobs, investment and opportunities for people in Scotland – which in return helps grow the economy and revenue for local services. We must begin to approach Business Rates with this mindset.
CBI Scotland was pleased to see many of its recommendations on Business Rates in the Barclay Review report and subsequently adopted by the Scottish Government. In particular, bringing the Large Business Supplement (LBS) into line with the rest of the UK would be a major boon for competitiveness. The Scottish Government should explicitly commit to reduce the LBS to 1.3p by no later than April 2020 as recommended by the Barclay Review. Concrete assurances on implementation dates will provide businesses with certainty and confidence.
The Barclay Review also noted that consideration should be given to linking inflation increases in Business Rates to CPI instead of RPI. With RPI inflation currently at a near-six year high, Scottish businesses are facing further pressure from unsustainable increases in their rates bills. In line with UK Government action, the Scottish Government should link inflation increases in Business Rates by CPI from 2020. This would strike the balance of protecting tax revenue for the Scottish Government in real terms and moderating the unsustainable rate of increases in Scottish Business Rates.
CBI Scotland remains concerned that the overall rates burden will remain tough for firms. The fact that any accepted Barclay Review recommendations are unlikely to be implemented before the next round of revaluations means that Business Rates will remain a challenge for businesses for the foreseeable future. Temporary reliefs have been welcomed by recipient businesses, however given their temporary nature, clarity on whether these funds will be available up until the adopted recommendations of the Barclay Review are fully implemented is required as soon as possible so that businesses can plan accordingly.
Air Departure Tax (ADT) is an economic lever that could help boost Scotland’s international competitiveness. Business wants to make Scotland the place to be by attracting more talent, inward investment and ambition to one of the most exciting and promising countries in the world. One of the prime ways of doing that is by improving our international connectivity. CBI Scotland was disappointed to see the Scottish Government’s plans for an overall 50% reduction in ADT delayed. CBI Scotland believes the reduction and eventual abolition of ADT could give Scotland an edge in the global marketplace for inward investment, tourism and trade. Bringing all UK airports into line with international competitors would send a clear message that all nations and regions of the UK are open for business. The UK and Scottish Governments should work together to provide a solution to the Highlands and Islands exemption issue that protects the local economy and enables Scotland to benefit from this economic boost.
To ensure the reduction is applied in the most effective way the Scottish Government should prioritise an immediate cut across bands as soon as possible to generate maximum impact. In the long-term, it should keep the structure of ADT simple and consistent to avoid unnecessary cost and complexity and, in particular, shadow as closely as possible the existing UK framework going forward.
2. Education and skills
- Allocate a greater share of Apprenticeship Levy funding to the Flexible Workforce Development Fund to help businesses tackle skills gaps
- Create and fund more high quality vocational options for 14-18 year olds that have parity of esteem with higher qualifications to help improve educational outcomes and ensure young people are ready for the workplace
Education and skills are key long-term drivers of productivity and access to skills is one of the biggest challenges facing businesses across Scotland. Around 90% of the current workforce will be in employment in 10 years’ time, and the world of work is changing. Technology is reshaping business and opening up new opportunities, meaning on-the-job training is crucial. Businesses are committed to investing in skills, with nine out of ten firms in Scotland having a learning and development strategy, while more than eight in ten have a dedicated training and development budget.
Almost a third of firms across Scotland see the biggest opportunity created by the introduction of the Apprenticeship Levy as being able to develop and upskill existing staff through new training. The introduction of a Flexible Workforce Development Fund was therefore a step forward in recognising the importance of supporting firms to upskill and retrain existing staff and allowing businesses to decide what training investment is most appropriate for their needs. However, at just £10m (less than 5% of the Scottish Government’s Apprenticeship Levy funds), the fund itself is very small in comparison to the size of the challenge firms face. The current blanket £10k cap per employer prohibits companies from offering the type of high-quality training opportunities the fund should be designed to support. For the Flexible Workforce Development Fund to be a success and provide businesses with real help in tackling skills gaps, there must be a greater portion of levy funds allocated to it.
Businesses themselves are best placed to decide who the most appropriate training provider is for the training they need. The Flexible Workforce Development Fund should therefore also be expanded to include all accredited training providers, rather than being restricted to delivery exclusively through the college sector.
Striking the right balance between traditional qualifications and vocational education is key to ensuring we are equipping young people with the skills businesses need. The Scottish Government should create and fund more high quality vocational options for 14-18 year olds that have parity of esteem with higher qualifications to help improve educational outcomes and ensure young people are ready for the workplace. When asked what the most important factors are for businesses when recruiting school and college leavers, 86% of firms in Scotland said their attitude to work. This was followed by aptitude for work at 64%. Both ranked well above formal qualifications, at just 47%. Therefore improving vocational options and increasing young people’s exposure to the workplace can help ensure school and college leavers are equipped with the skills and attributes needed to hit the ground running in the world of work.
- Deliver the current pipeline of transport infrastructure commitments as quickly as possible and improve transport links with the rest of the UK to drive productivity gains
- Focus on supporting competitive markets to deliver secure, affordable and low-carbon energy supplies, which will provide best value for money for consumers
- Ensure the Scottish National Investment Bank prioritises encouraging greater patient capital investment to support infrastructure development in the long-term
Improving connectivity and minimising travel times to give businesses access to a greater pool of talent is key to increasing productivity. Improving connections between and within Scotland’s City Deal Regions can help to drive growth across Scotland. CBI Scotland would therefore encourage the Scottish Government to focus on the fastest possible delivery of existing transport infrastructure commitments – notably road improvements to the A9 and the Aberdeen Western Peripheral Route – and to work with business to identify the next generation of infrastructure projects that will deliver maximum economic benefit.
It is not only transport links within Scotland that are crucial to driving productivity improvements. In 2015, Scotland’s exports to the rest of the UK were worth nearly £50bn – nearly two-thirds of total exports from Scotland – showing the importance of transport links between Scotland and key markets across the rest of the UK. CBI Scotland welcomes the recent announcement that feasibility studies are to be carried out into options to reduce cross-border train journey times. Reducing the journey time between Edinburgh and Newcastle to one hour, and reducing journey times between Glasgow and Edinburgh and Carlisle will increase opportunities for trade by better connecting Scotland with key markets in the north of England, which in-turn could deliver considerable economic benefits.
Developing the role that a low-carbon economy plays in delivering prosperity and growth across communities, driving innovation and creating local and global opportunities is a challenge for both business and government, and will require considerable collaboration. Against a challenging economic and fiscal backdrop, ensuring value for money for the taxpayer is key and careful consideration must be given to any government intervention in the energy market.
The creation of a state-owned energy company would be complex and require significant initial public funding, with no guarantee of a return on that investment. The Scottish Government should instead continue to work closely with stakeholders to understand how resource might be better utilised to support low-carbon transition that delivers secure, affordable energy for consumers. In particular, the Scottish Government should prioritise supporting a competitive energy market, for example by encouraging consumers to switch providers, which will provide the best value for money for consumers.
The Scottish National Investment Bank (SNIB) will also require significant initial funding. However, its development is an opportunity to consider how the Scottish Government could encourage greater patient capital investment to support infrastructure development, which is crucial to long-term productivity improvements, as well as supporting businesses to start and grow. The UK has a world-leading financial services sector which helps provide the finance necessary for the business community and the wider economy. This is a time to be bold and ambitious.
As a potential cornerstone institution in the delivery of long-term investment to support economic development, the SNIB has a role to play in supporting private and public initiatives to do even more for the Scottish economy. It is therefore critical that the corporate voice is heard at a strategic level within the SNIB. Beyond the implementation period, a permanent business advisory group consisting of financial services providers, infrastructure providers and firms of all sizes should be established to provide a valuable conduit to ensure that the SNIB has the relationships it needs to consider market trends, international competition and make an impact.
- Set a target for combined public and private expenditure on research and development as percentage of GDP
- Support Innovation Centres to set up innovation diffusion pilots to test different types of on-the-ground support for businesses
- Provide clarity on the Scottish Government’s approach to the UK Industrial Strategy
Innovation is at the heart of economic, social and cultural development. It drives productivity, raises living standards, has wider social benefits and helps lay the foundations for tomorrow’s world. Business shares the Scottish Government’s ambition that Scotland becomes a world-leading innovative nation. Scotland has a developed innovation ecosystem but risks falling behind the rest of the UK and internationally particularly on research and development (R&D). The most recent official data indicates that gross expenditure on R&D was 1.46% of GDP in 2015, compared to 1.95% for the EU and 1.68% for the UK. There is a lot of potential for Scotland to take advantage of the R&D benefits to productivity.
Boosting business expenditure on research and development (BERD) will be vital to meeting this ambition. In line with long term trends, Scotland performs less well on BERD when compared with the rest of the UK.
Internationally, Scotland ranks in the fourth quartile of the OECD in 2015 on BERD. CBI Scotland welcomes the Scottish Government’s recognition of the need to boost business spend in this area and recent announcements to support this, including £45 million to unlock business expenditure on R&D. Previous CBI research has highlighted the role that public funding plays in the R&D puzzle, with evidence that government spend crowds-in private sector expenditure.
The Scottish Government can and should be more ambitious regarding its objective for research and development. It should revise its national indicator on R&D to set a concrete target for combined public and private R&D expenditure as a percentage of GDP. A target will provide a crucial indicator that Scotland is open for business, setting ourselves up to be a competitive, globally-focused economy. It can provide confidence to domestic and global businesses alike at a time of unprecedented change and focus attention on the need for both the public and private sectors to invest in R&D. CBI Scotland urges the Scottish Government to consult on an appropriate target for Scotland and confirm this target in 2018.
Yet building an innovative and productive nation is not just about how much is spent on R&D. Take-up of tried-and-tested technologies is also important. For developed economies like the UK’s, McKinsey Global Institute (MGI) estimates that at least 55 per cent of labour productivity growth will come from firms adopting existing best practice, also known as ‘diffusion of innovation’. The remaining 45 per cent of productivity growth will come from innovation creation.
Scotland’s best performing businesses are highly innovative, moving first to adopt the latest in cutting-edge technology or creating innovation themselves. This is crucial to increasing competitiveness and a strength of the economy. But best practice must reach a greater range of businesses. Many firms suffer from a ‘failure to adopt’ that leads to big disparities in productivity and pay. For example, in 2015, the proportion of UK firms adopting cloud computing was nearly 30 percentage points below Europe's best performers. Moreover, there is a lasting and damaging impact of low adoption. CBI analysis also indicates that 'follower firms' underinvesting in readily available technology now, like cloud, mobile and security technology, are less likely to invest in cutting-edge technologies like artificial intelligence and blockchain in the future. Improving productivity through the adoption of proven technologies and management practices would enable innovations to reach their full potential, giving Scottish firms and the economy a greater competitive advantage.
Government and business must lead a long-term change in Scotland’s adoption of technology and management best practice. Piloting what works can inform each local area’s approach to increasing adoption across the country. The Scottish Government should widen its focus on innovation from innovation creation to diffusion. It should set up innovation diffusion pilots to test different types of on-the-ground support for businesses. Establishing a competition among the Innovation Centres to deliver pilots providing practical support for firms to be better adopters of tried-and-tested technologies and management practices would be an ideal first step.
The UK Industrial Strategy also has a role in supporting Scottish R&D, diffusion of technologies and other productivity improvements. However, it remains unclear how business in Scotland will benefit from the Industrial Strategy due to the overlap of responsibilities of the Scottish and UK Governments against the Industrial Strategy pillars, and existence of aligned strategies in Scotland such as the Economic Strategy. Businesses are looking for clarity regarding the Industrial Strategy’s application in Scotland and how the Scottish Government will engage with it. The Scottish Government should set out its position on the Industrial Strategy urgently and position itself to make the most of initiatives that will bring productivity benefits to Scotland.
 Pursuing Prosperity, CBI Scotland, June 2017
 The Fraser of Allander Institute forecast economic growth of 1.2% in 2017 and 1.4% in 2018. It expects the Scottish economy to grow more quickly this year than, but that such growth is likely to remain below trend with uncertainty weighing heavily on the outlook; Economic Commentary Vol 41 No 3, Fraser of Allander Institute, September 2017
 Economic Commentary Vol 41 No 3, Fraser of Allander Institute, September 2017
 UK consumer price inflation: October 2017, ONS, November 2017
 Economic Commentary Vol 41 No 3, Fraser of Allander Institute, September 2017
 Helping the UK Thrive, CBI/Pearson Education & Skills Survey, July 2017
 The impact of an increase in the additional rate of income tax from 45p to 50p Scotland, Scottish Government, March 2017
 Scottish Business Rates: Barclay Review, CBI Scotland, October 2017
 UK employer skills survey 2015, UK Commission for Education and Skills, January 2016
 Helping the UK Thrive, CBI/Pearson Education & Skills Survey, July 2017
 Gross Expenditure on Research and Development (GERD) 2015, Scottish Government, March 2017
 A Nation with Ambition: The Government's Programme for Scotland 2017-18, Scottish Government, September 2017
 Now is the time to innovate, CBI, March 2017
 From ostrich to magpie, CBI, November 2017
 Building our Industrial Strategy – green paper, HM Government, January 2017