There is much still to be done to repair the Scottish economy after Covid-19

In the fourth part of a series exploring how life in Scotland has been changed by the pandemic, Ben Wray examines the impact on the economy

TO say the coronavirus pandemic impacted Scotland’s economy would be the understatement of the year. Scottish GDP fell by 19.4% in the second quarter of 2020, the sharpest drop on record.

However, the rebound has been fairly swift. The Fraser of Allander Institute expects Scotland to recover its pre-pandemic GDP by May this year. Employment figures show Scotland returned to its pre-pandemic employment rate in September-November last year, before dipping again in October-December with the arrival of Omicron.

If we were only to look at the headline figures, the Scottish economy is basically back to where it was before Covid-19 entered our lives. But to leave it at that would be to completely misunderstand what is really happening. The Scottish economy is undergoing seismic changes from the pandemic, with short, medium and long-term effects on all of our lives.

Five big changes

ECONOMIST Laurie Macfarlane co-authored a report for the Scottish Trades Union Congress (STUC) last year looking at the economic effects of Covid-19 on Scotland and he told the National there are five areas where they identified “big changes”.

The first is that the pandemic has “massively accelerated the shift to online retail and away from high-street spending. This was happening anyway but the pandemic has really sped that process up.”

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The effect of this on local economies has been dramatic. In the first six months of 2020, Scotland had a net loss of 393 stories (-2.4%). In 2021, the net loss was lower (-0.9%) but in England high street shops increased by 1.3%. The “Amazonisation” of Scottish retail is accelerating rapidly.

The second big change is the rise of home working, which has rendered large swathes of commercial real estate redundant, as businesses downsize their offices or get rid of them altogether. Office vacancy rates in Edinburgh increased by 45% in 2020, higher even than London (32%). What to do with all that unused office space is something that Scotland still needs to grapple with.

The third factor is the impact of lockdown on household finances, which has intensified inequality.

“A section of the population, typically people in higher-waged jobs who could work from home, built up large savings in the pandemic, because you kept your income and couldn’t spend money in bars, restaurants and on holidays,” Macfarlane explains. “And at the other end of the scale, people who were furloughed or lost their jobs were pushed further into debt.”

Fourth, a boom in the Scottish property market has accompanied the pandemic. Scottish average house prices rose to £183,000 by November 2021, an 11.4% annual rise that was the highest of any nation in the UK. Good news for those who already own property, but it has “kicked the ladder further out of reach for those who don’t,” Macfarlane, a research associate at the UCL Institute for Innovation and Public Purpose, says.

Finally, Covid-19 disrupted long and complex international supply chains. With countries suddenly reluctant to export their PPE and ventilators, a lack of domestic production capacity became a serious risk.

“When it came to PPE, the initial thought was ‘we can’t get any because we don’t make any’,” Macfarlane says. “But the Scottish Government had a pretty adventurous industrial strategy because they rapidly created a domestic PPE supply chain, getting domestic firms to produce PPE equipment and supplies for the government.”

Macfarlane believes the lessons of the PPE success story have not been fully absorbed when it comes to the Scottish Government’s economic strategy going forward.

“The Scottish Government could be doing the same thing it did with PPE in other areas to reduce reliance on international markets, boost manufacturing capacity and supply chain resilience but policy approaches too often are stuck in a pre-pandemic mode of thinking.”

Transformation or continuation?

ONE possible example of this “mode of thinking” is the Scottish Government’s new 10-year national strategy for economic transformation, led by Finance Minister Kate Forbes and her 17-person advisory council, which had been delayed since last autumn but was finally released on March 1.

The report mentions “ensuring resilient supply chains” as an important aim, but it’s key targets point towards more internationalisation of the Scottish economy – raising exports from 20% to 25% of GDP, increasing foreign direct investment so Scotland is on a par with east England, and making Scotland a “magnet for inward investment and global private capital”.

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Macfarlane, who worked with the Scottish Government on the policy design of the Scottish National Investment Bank, says this “represents the continuation of a development model focused on attracting foreign investment and international finance, in the hope that this will boost exports.”

“This is not a programme of national economic transformation: it is a programme for economic continuation,” he adds.

The strategy contains six programmes, 18 projects and 77 actions across a whole range of areas, but it was criticised by one of its own advisory panel members, STUC General Secretary Roz Foyer, for ignoring the “foundational economy” – sectors such as food, energy, retail, health and care – which were revealed to be so vitally important during the pandemic, and have overwhelmingly female workforces.

“Jobs in these sectors are often characterised by low pay and insecurity, and some – such as high street retail – face a highly uncertain future after the Covid-19 pandemic,” Macfarlane says. “For a strategy focused on economic transformation to say precisely nothing about such a large and crucial part of the economy amounts to a major oversight.”

Philip Whyte (abive), director of think tank IPPR Scotland, told The National that although the report contains “some good ideas” it was “a missed opportunity” to set a strong vision for “what we want society to look like in 10 years’ time and how we are going to get there”.

“I don’t think it’s enough for any of us working on policy to just present a positive vision and hope for the best,” he said. “That needs to be backed up by the resources, the specific interventions and the action plan which will help you to get there.”

A Renewables Revolution?

ONE key area for economic transformation over the next decade is the net-zero transition but the jobs windfall which was promised 10 years ago has not come to fruition thus far.

The latest data shows the number of jobs in the renewables sector has fallen for the fourth year in a row, down to 21,400 from 24,000 in 2016.

How can this be turned around? The latest developments, with plans for “Green Freeports” and the “ScotWind” offshore wind licensing, have both been at least partly premised on providing a green jobs boost, but there are reasons to be sceptical.

Freeports are tax-free zones which are supposed to attract international capital due to the ultra-cheap costs of production on offer, thus boosting jobs and exports, but Macfarlane says that their track record is not so promising.

‘IN other examples where freeports have been set up you see economic activity just being relocated to the freeports rather than creating new activity, and then you just end up losing tax returns,” he says. “These freeports can also be hotbeds for money laundering.”

As for ScotWind, although supply chain commitments were part of the contract conditionality for the leases, there was no stipulation on a specific proportion of the work which had to be undertaken locally.

Analysis by the STUC has found that 14,400 jobs could be created in Scotland through ScotWind if the supply chain work was based in Scotland, but that number could fall to as few as 2600 if not. Some 95% of the leases have gone to companies based outside Scotland.

Whyte, who previously worked in the civil service on the Scottish Government’s Programme for Government, says this is an area where lessons need to be learned quickly. “If you look at offshore renewables, there has been a rush to the end-point, without considering how the supply chain at every stage of the process can contribute to that,” he says. “The aim should be to get a big chunk of the offshore renewable supply chain delivered in Scotland.”

Macfarlane believes Westminster-imposed limits on the Scottish Government’s borrowing powers do restrict what it can do in terms of public investment, but nonetheless the ScotWind development mirrors “the mistakes made in the North Sea with oil and gas”.

The UK Government privatised the “black gold” in Scottish waters, whereas Norway created a state-owned company, StatOil, to get maximum value for the country from its oil and gas. One think tank has found that decision led to Norway benefiting by an additional £400 billion in government revenue compared to the UK over the past 40 years.

“As a minimum, the Scottish Government could have said ‘we will take a 50% equity stake in every ScotWind licence agreement, so we are sharing in the profits for Scotland’,” Macfarlane argues. “Instead they’ve got a one-off £800 million, which is a paltry sum.”

THE Cost of living crisis

THE most immediate economic challenge the Scottish Government faces is to find a way to alleviate inflationary pressure on Scottish households. The supply chain disruptions and shortages triggered by the pandemic is one of the factors which has lead to a global cost of living crisis.

The main response so far has been the cost-of-living payment scheme, which will see those in council tax bands A to D and all of those eligible for council tax reduction get £150. However, the scheme, which mirrors UK Government policy, has been widely criticised for not being targeted enough at those in poverty.

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ANALYSIS by IPPR Scotland has found that the £290m scheme amounts to “a tax cut for one in three people on the highest incomes”. Forbes has herself admitted it is not “a perfect scheme”, and Whyte argues that if the aim was to help those most in need, it has not been as well designed as previous welfare support packages.

“The Scottish Child Payment was a really direct and effective way at pulling people’s incomes up and getting them just over the poverty line,” he says. “Council tax is not a great system for this because it doesn’t recognise the individual circumstances of people living in these households.”

However, welfare support is not the be all and end all of tackling the cost of living crisis. Whyte says the Scottish Government also has to “identify opportunities to intervene” in the areas it has powers over, such as housing, public transport and childcare, to ease the burden on low-income families.

“Reducing costs is absolutely a key part of what needs to be done,” he says.

Whether it is the short-term threat of the rising cost of living, the medium-term test of zero-carbon jobs or the long-term challenge of economic transformation, the Scottish Government has plenty of work to do.

Tomorrow: Part five – local government