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Beyond the Crunch – Business 7

Ben Thomson
Business 7, 18th April 2008

There is currently much anxiety about the state of the economy both in Scotland, the UK and the rest of the world as a direct result of the credit crunch. Governments everywhere have gone into crisis management to ensure that banks have enough capital to provide liquidity in the market. This week the UK alone made available another £15billion to help banks ride the storm.

Crisis management, though, is not a tool for growing the economy; it is merely a reaction to an event, in this case caused by the over-lending of banks and others, particularly in the mortgage and sub-prime markets.

We have no real idea about the extent of the crisis or whether it will last one year or three. It should not, however, deflect us from the vital debate about how we grow the economy in the long term. This is particularly important in Scotland where we face some serious challenges about our ability to create an environment that attracts and retains businesses and gives the right incentives to enable them to grow. This is coupled with the likelihood that Scotland will gain new powers over the next few years which now, in different forms, seems to be supported by all four leading political parties.

This week, a group of like-minded people from the business community launched Reform Scotland, a new, independent think tank of which I am chairman, to address the long term economic challenges facing Scotland. Reform Scotland has been established to convince politicians and other key influencers to adopt policies that will promote economic growth and provide efficient, value-for-money public services. Our starting point is that there are many good things about Scotland but that we are not nearly reaching our full potential. We need to research how other countries around the world have adopted new policies and apply them in the most suitable way to Scotland.

Scotland’s GDP per head significantly lags behind that of the most successful economies such as the USA, Norway and Ireland. We believe that we should aspire to match their wealth, raising the living standards of all. Our first report, ‘Powers for Growth’ published in March, examines what factors contribute to economic growth in different countries and how Scotland compares. It highlights that our business start-up rate in Scotland is very low, both compared to the rest of the UK and Europe: our productivity in Scotland is 30% lower than that of the US, and 10% lower than the European average. Our overall tax rate in the UK is now higher than the OECD average. Over the last ten years we have seen a net emigration of our population while we are fast becoming the most public sector reliant economy in Europe, with Government spending representing over 54% of the Scottish economy. The report concludes that to grow we will need to reduce the proportion of our economy in the public sector and that we need a low competitive overall tax regime.

To reduce the level of public spending in Scotland as a share of GDP requires public spending to grow more slowly than the economy as a whole. The key to achieving this is reforming public services in Scotland so that they deliver better value for money which is the focus of our second report, ‘Power for the Public’.

We have also argued that greater financial powers for the Scottish Parliament could help to create a platform for higher economic growth in Scotland. In the two critical areas of taxation and spending, the UK has been moving in the wrong direction which is detrimental to the Scottish economy. It has also limited the ability of the UK Government to reduce taxation in order to stave off recession if our economy starts veering that way.

The current UK policy environment also does not work well for many of the nations and regions of the United Kingdom, where growth lags behind that in London and the South East. If additional powers were used to reduce the tax burden in Scotland and control spending then they would be valuable. However, if used to increase taxes, they would be harmful. Ultimately, it is how the powers are used that matters.

The business community needs to get involved in the debate about how additional powers for the Scottish Parliament might be used. Politicians in Scotland certainly seem far keener to engage with businessmen and women, as we saw at the last Scottish elections.

This has drawn more people from business into the debate about Scotland’s future – a trend very much to be encouraged. This is certainly one of Reform Scotland’s aims and I am delighted that leading figures such as David Milne of Wolfson Microelectronics, Lesley Knox, Chairman of the Alliance Trust, and Trevor Matthews, formerly Chief Executive of UK Financial Services at Standard Life have agreed to join our Advisory Board. They see the advantages of an independent think tank that can carry out research into specific areas of public policy and develop new ideas unconstrained by the need to win elections of represent the interests of members.

Reform Scotland’s objective is simple – to inform and influence the public policy debate. The next few years in Scotland present an unparalleled opportunity to bring about real change in the public policy environment.

At Reform Scotland we aim to be major focal point for that debate. It is vital that as many people as possible become involved.