In April, the Scottish government reluctantly admitted that the economy north of the border grew by just 0.3 per cent in GDP in the last quarter of 2017. A political battle over the economy has been raging for some time in Scotland; the SNP blames Westminster, austerity and Brexit for underwhelming growth. Holyrood opposition, meanwhile, blames the SNP and accuses the party of placing Scotland’s economy in jeopardy.
The debate raises a key question: to what extent is Scotland’s economic trajectory tied up with that of the wider UK’s? Just how much power does the SNP hold to determine the economic course of the nation? UK GDP grew by 1.8 per cent in 2017; within that overall figure, Scotland’s economy grew by 0.8 per cent. The Scottish Fiscal Commission has warned that Scotland is facing five more years of “subdued growth”, so who is to blame?
Russell Gunson, head of IPPR in Scotland, says that there are some “Scottish-specific” factors at play, such as the oil price crash in 2014 which caused revenues from North Sea Oil to plummet by 97 per cent, but the economy is broadly following “a wide trend” visible across the UK. “Over the last 20 years we’ve caught up with the UK’s productivity rate, but in recent years – just like in the UK – productivity growth has been pretty flat, which means wage growth is flat, which means economic growth is flat too.”
Nicola Sturgeon and her cabinet have an ambitious policy aimed at lighting a rocket under GDP figures. In autumn 2017 she announced plans to set up a national investment bank and she reinforced her commitment earlier this year, declaring it would be operational by 2020. Benny Higgins, CEO of Tesco Bank, was appointed to oversee the process.
The official implementation plan states the bank will make £2bn worth of investment available over a period of ten years – the equivalent of 1.3 per cent of national GDP. An initial public investment of £340m has been budgeted by the government. Keith Brown, the outgoing Cabinet Secretary for Economy, Jobs and Fair Work, has led on this policy since its inception. He explains that the bank will focus its investment on small to medium-sized enterprises (SMEs), providing “strategic, patient capital … [offering] debt and equity financing that must be repaid on a commercial basis typically over a 10-15 year period.”
Gunson argues that the focus “needs to be on boosting productivity and innovation”. He welcomes the emphasis on SMEs, as “there’s an issue around the everyday economy, rather than the more glamorous parts”. Retail, for example, is just as much in need of attention as fintech, he argues – economic bread-and-butter stocks are low. As the majority of people in low-paid work are in sectors such as retail, hospitality and care, “boosting productivity in these low- wage sectors could have a double prize – boosting the economy but also boosting for some of the lowest paid, reducing in-work poverty and inequality.”
According to a government spokesperson, the Council of Economic Advisers – a group established to advise the government on how to make the economy more competitive – identified a national investment bank as “the best way to deliver infrastructure development, finance for high growth businesses and strategic investment in innovation.” But why is investment by the state any different to private sector investment?
The crucial distinction is the terms and criteria for investment. Gunson describes it as “relationship lending; the lender isn’t just passively giving money and hoping for it back.” The loans are offered over a longer period, and aimed at businesses that the bank judges will have a knock-on growth effect and “fulfil wider social aims in doing so.” “[The bank] is in it for the long haul rather than a short-termist investor that wants their money back as quickly as possible.”
So what are the next steps? “The Cabinet has accepted all 21 recommendations in the Implementation Plan,” says Brown. “We are now moving into the delivery phase.” But a significant hurdle still lies ahead, and unsurprisingly it comes from Westminster.
“Banks need to be able to hold assets and carry them over,” says Gunson, unlike a spending department which receives its money from the state. In order for the bank to be capitalised – have adequate assets to meet obligations and issue bonds – the Treasury must agree to treat it as a bank rather than a department, so that it doesn’t affect the Scottish government’s budget. The Scottish government, with its existing power, can provide all the funding, but “to reach that full [bank] status, the Treasury needs to give it the green light.”
Is Brown confident of getting the green light? “Discussions to date have been both positive and constructive, and we are hopeful of agreeing an approach that will be beneficial for all parties,” he replies. “Establishing this bank will stimulate economic growth in Scotland, and will in turn improve the UK’s wider fiscal position.”
As to whether £2bn of investment over ten years is enough, Brown asserts that “it represents a similar proportion of GDP” as committed by national development banks in other countries. He says the proposal is “ambitious and achievable, at a level that will make a material difference to the supply of capital to the Scottish economy.” Gunson concedes that £2bn is a “decent amount” of money, but wonders if ten years is “on the long side for getting to that level. If we can do it quicker, we should.”
The bank is expected to become self-sustaining over time through its investments. It will have achieved this when it “covers its operating costs from investment returns”, explains Brown, and is able to “raise capital in its own right and no longer be reliant on capital advances from the Scottish government.” Brown says he expects this to happen in the “medium term”.
Is the SNP acting out of irritation with Westminster, and austerity? “It’s more down to a Scottish-focused narrative,” responds Gunson. “The big push for the SNP is around inclusive growth … so I think it’s much more around genuinely wanting to drive the economy and shape a different economic model in Scotland.”
The SNP are certainly feeling the pressure to see improvements. Planned increases to income tax for those earning £33,000 or more came into force in April 2018, and the Scottish Conservatives have criticised the SNP for creating an environment that is even more hostile to investment. Gunson takes issue with this view. “It doesn’t really stack up that the economic growth problems are down to income tax rises because that has just happened, whereas growth hasn’t been good for a wee bit longer.” Scottish Labour, meanwhile, called the bank “timid”, claiming they would invest ten times as much.
The SNP points to UK-wide economic problems, but the party is not in favour of UK-wide answers, or a UK-wide bank. Brown explains: “The implementation plan team considered the role of the British Business Bank but evidence suggested that a more Scottish-specific approach was required. [There is] strong evidence that the nature of the Scottish economy and challenges are different to those in the rest of the UK. For example, the Scottish economy is more sensitive to reduced migration.” He references the work of Professor Mariana Mazzucato, a member of the Council of Economic Advisers and author of The Entrepreneurial State. “She stressed the importance of a mission-based approach crucially aligned with devolved policy and intended outcomes.”
The proof is in the pudding, says Gunson. A lot depends on whether “it can reach its full potential”. That is, first and foremost, dependent on whether the Treasury gives it permission to become a fully functioning bank. After that, it depends on the scale and type of investment. “Is this another announcement that won’t have any impact, or is this one that will?”
The SNP are banking, so to speak, on this working. The government claims it will be a “cornerstone financial institution,” providing the investment desperately needed to achieve Scotland’s “economic ambitions”. “We want Scotland to be the investor and the producer, not just the consumer, of innovations that will shape the lives of future generations,” declares Brown. The SNP is searching for economic answers; time will tell if this is the right one.