An economic future

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by Calum Cashley

So, the GERS ping-pong and similar spats are fiscal arguments rather than economic debates, and GERS, in particular, is a sterile fiscal argument that ignores much of how nations operate, ignores, indeed, how the UK operates. If you want a different look at deficits and what they mean I can think of no better recommendation than watching my old friend from school, Professor Mark Blyth – he’s an economist but he’s not bad really. So what would constitute a fair economic future for Scotland? How would we measure economic optimism and pessimism, how do we judge the actual economic debate? How do we lay down the parameters of economic viability for an independent Scotland?

Well, we’re talking not about whether we’d be fabulously wealthy or miserably poor, not about the current performance or the recent performance, nor even about whether we have the right or the wrong politicians. An economy ready to face the world as a tool of an independent country must have a wide base, a good variety of inputs and outputs; it must range across the whole country – it is likely to have different strengths in different parts of the country, and different aspects will be at different strengths in different parts of the country; it should have flexibility – the ability to change as needed; and there should be strength in depth in the major fields of the economy. To some extent, the space to grow in each of these categories can replace the need to have the capacity but throughout all of them there must be an element of resilience, without which the economy would be too fragile to be useful. The rate of business creation and attrition must play some part in the decisions on growth and resilience, and there will be other measures which can be added in as we come to them.

There are other ways of measuring innate economic strength, one of which, Natural Capital Accounting, was used by Slesser, King and Crane in the mid 1990s on a study of the possible future economy of an independent Scotland where the conclusion was that independence would be good for Scotland’s economy and would help the sustainability of Scotland in the longer term. Malcolm Slesser was an SNP member and stood for the party in parliamentary elections and he was also a respected academic. That isn’t the only alternative way of measuring an economy there are others, but let’s stick with the few measures mentioned earlier. The debate about measuring the economy will, no doubt, carry on for some time yet and I’ll content myself in the meantime with fashioning my own argument which will, no doubt, evolve over time.

The first point of inquiry, then, is does the Scottish economy engage its population? Labour market statistics in the process of being published (covering May to July 2010) as I write this show an economic activity rate of 77.5% for those of working age (slightly higher in men, slightly lower in women). The 22.5% inactive will include students, homemakers (a word I detest but can think of no other at present), those in ill-health and those who act as a carer for a relative or otherwise unable to work, but it represents 764,000 who are economically inactive. There are about 200,000 Scottish domiciled students in our universities and about 80,000 full time students in our colleges (roughly one tenth of Scotland’s working age population is enrolled in our colleges in one way or another) and there’s about 77,000 pupils still at school after reaching 16. I can’t, at the moment, find figures for the number of carers, people incapacitated through ill-health, or homemakers so can’t quantify them so they stay in the figures for now, leaving about 400,000 working-age Scots economically inactive although only 239,000 are declared as unemployed.

That seems a bit of flab in the economy and cause for a little concern. It’s not a new phenomenon, either, data going back to 2002 show that 74% was the norm for a while and a range between there and 77% held sway until the end of 2006. Economic activity rates went over 78% for a while but fell back and are actually recovering now and even excluding students and stay-on pupils, we still have around 12% of our working-age population economically inactive. That is always going to be an unused resource, if not an actual drain on our economy, and should be addressed, and that’s before you add in the citizens of this nation who are over 65. It’s interesting that it has been almost static for so long – the difference between the 74% and the current 77.5% representing around 119,000 people – quite a chunk but only just over a fifth of what it was and a quarter of the gap that still exists. It’s interesting, also, in that it suggests that the recession has not had a massively deleterious effect on our economic activity; that the Scottish economy has actually held up – in these terms – relatively strongly. There is the question of whether the economic activity is high value, and whether the overall value of economic activity in Scotland has been affected but, in terms of whether people are actually engaged in the economy, it is quite a good news story.

Additionally, it suggests that there is a workforce available for growth in the economy (disregarding, for the moment, whether that workforce has the skills that the growing sectors of the economy will need or whether it is distributed well in the geographical areas in which growth is likely to happen) and that employment growth is not just possible but desirable.

The next question would seem to be where those people are employed, both in sector terms and geographically – how wide a base does our economy have?

Excluding central and local government, there are 291,380 enterprises in Scotland (up by 12,000 since 2007 and up by 55,000 since 2000 – 2009 figures, 2010 figures are due soon) of which two thirds are sole traders and nearly 92,000 are small businesses employing fewer than 50 people each. There are 2,315 businesses in Scotland which employ more than 250 people each and 3,640 which employ between 50 and 249 people each. That’s a good spread and suggests a degree of resilience with the spread of employment allowing a few bumps and bruises to be managed. I’m impressed with the number of Scots who have their own businesses, too – giving a lie, I think, to the oft-repeated comment that we’ve lost our entrepreneurial spirit. 193,550 sole traders and 91,875 small businesses suggest a couple of hundred thousand self-employed people in Scotland – actual figures might be skewed by individuals owning more than one business, for example, or by partnership owning. These are all, however, businesses which reported turnover so no shelf companies are in those numbers.

The sector spread is quite wide based, no over-reliance on any one sector, the smallest sector in terms of numbers being “financial intermediation” with about 3,250 companies, followed by “mining and quarrying, utilities” with around 3,350.

Likewise, the numbers employed in these enterprises are well spread, the smallest sector being the motor trade with 45,350 employees, manufacturing having 224,170 employees, agriculture 60,570, and so on – a wide, comfortable and accommodating spread. There’s not enough information in the Corporate Sector statistics to get to in-depth information about oversupply or gaps in provision so I’ll leave that aside just now and perhaps return to it later.

The number of private sector businesses increased by 3.3% between March 2008 and March 2009 and it was small firms that accounted for almost all of that rise while those private sector enterprises created more employment over that year – a 2.2% increase. It suggests a strong economy that can keep growing in the face of the economic difficulties which were becoming more than apparent over that year – and a self-confidence in Scots that allowed people to stride out on their own.

Most of our business sector is home grown too – only 3.1% of businesses operating in Scotland are owned outwith the country (and that doesn’t take account of those shareholders who own shares in these companies and live in Scotland. The difficulty I find is that these external companies (including those owned elsewhere in the UK) account for more than a third of Scotland’s private sector employment – 35.3% – and 52.4% of turnover of private sector enterprises in Scotland (23.7% for businesses owned in the rest of the UK, 28.7% for businesses owned elsewhere in the world). Granted, they tend to be the bigger businesses (supermarkets spring to mind, for example) and that some of them might have started as Scottish businesses (Kwik-Fit, for example, now owned by a French company), but it appears a bit of a weakness that so much of the business transacted here is in companies owned elsewhere. Cross-border ownership is fine (Scots companies do it too) and their very presence here indicates a strength in our economy but the profits made from the business transacted go elsewhere and I cannot escape the feeling that we should be looking to grow indigenous companies to balance it a little more in Scotland’s favour.

That, of course, once more ignores the shareholders who live in Scotland but have shares in companies furth of Scotland. It also excludes financial intermediation enterprises (banks, credit institutions, leasing, insurance, pensions, securities, fund management, stuff related to these sectors and so on) because the turnover data of these institutions is not presented in a way which can be absorbed into the figures, so that may nudge things a little more in Scotland’s direction.

RBS announced £1.6bn in operating profits earlier this year (while it considers legal action against Goldman Sachs, apparently), Scotland’s other banks should follow – including the wee Airdrie Savings Bank – but Scotland’s other financial operators are also to be counted. We have hedge funds and investment managers including a new one launched in Glasgow (Crinan Capital) last month but also some longer established ones like Aberdeen Asset Management, Martin Currie, and Dundee’s own Alliance Trust – there’s about £650 billion investment under Scotland’s managers, £726 billion in pension funds management, and £685 billion in asset servicing.

We also have fairly serious players in the financial sector and it amounts to getting on for a couple of thousand companies (including the new ones coming recently) employing about 100,000 people. Scottish Financial Enterprise estimated that the GVA of Scotland’s financial sector amounted to some £7billion in 2008. The Investment Management Association reckons that 13% of all of the UK’s funds are managed in Scotland.

I haven’t used GVA figures much here – there are arguments both ways on their use and some of the figures would help bolster my case; ONS figures, for example, suggest that Scotland has 8.4% of the UK population but 8.5% of the economically active population and 8.2% of GVA. GVA should be taken with a touch of caution at this level, though, as pointed out by ONS. Because of the methods of gathering information the confidence interval increases and ONS uses a rolling mean to smooth the effects. An interesting point about GVA made by ONS, though, is that it is measured where the wages are paid rather than where you live – as would be the ideal – meaning that London is overblown as a result of commuting, giving the wonderful irony that, according to the Office of National Statistics’ measurement of Gross Value Added, Scotland’s MPs contribute to the economic well-being of London and not of Scotland.

So how big is Scotland’s economy? Well, ONS gives our GVA per head (excluding oil) as being 97.9% of the UK’s (GVA, as noted, is skewed by much being reported in London when the work is done elsewhere) and has the North East of Scotland as the third wealthiest region in the UK (statistics due for update in December). Turnover of private Scottish enterprises (excluding the financial sector and North Sea Oil – so a fairly large chunk) was £249.5 billion in 2009 – up from £216.7bn in 2007 and £164.6bn in 2000.

The public sector is, to an extent, carried on the back of the private sector. There are arguments about whether Government spending crowds out private investment and therefore restricts economic performance and it is doubtful whether any theory will ever play out enough to balance itself up. It’s clear, however, that public sector employment in Scotland is nowhere near the levels sometimes claimed. The public sector employed 590,850 people in March 2009 and there were 24,980 employed in public corporations or nationalised bodies out of 2,586,370 – a little under 24%. Surprisingly, NHS and Social Work staff amount to 244,070; just under 40% of the total public sector employees, 9.4% of all working people in Scotland, or one in every 20 of our population. That’s a figure that I hope to have a look at in closer detail when I get some time.

I posited that an economy that was healthy enough to support an independent Scotland would have to have a wide base, flexibility, strength in depth, the space to grow, and resilience. I’ve sketched the beginning of the debate here – not completed the case by any manner of means – and I think we’re heading in the right direction, more can be found on Scotland Performs. Scotland’s economy isn’t homogenous, it has enough variety to allow it to absorb some impacts and recover, and it has resilience as we’ve seen. It has ingenuity and invention as well and it has intelligent operators who will protect their businesses (like the fishing fleet which has developed better fishing techniques to allow stocks to recover). Scotland’s people are engaged with the economy but there is still room to grow, there are opportunities and Scots are taking them. Scotland’s economy, it seems to me, isn’t a land-mass of industry so much as an archipelago of endeavour and the spaces between the islands might be as important as the islands themselves – there’s room for manoeuvre and there’s room for growth. There are weaknesses, certainly, as I’m sure there are in every economy, but there are great strengths as well. We may have far fewer of the employers of yesteryear who each employed thousands of workers but we have many, many more that are small enterprises, the dreams of individual people and the drive to make a living by their own hand. The size of the turnover of the Scottish economy is more than I expected it to be when I first started looking, and the fact that our GVA per head is approaching the UK average in spite of the skewing of London gives me great confidence in our ability to perform and to perform well economically. We punch above our weight in financial services and we punch above our weight in education, we have a robust and resilient economy.

Taken as a whole, I think it demonstrates that Scotland has an economy which can see us into independence and serve us well there. It won’t stay the same, it will change, but it should stay strong unless government makes a mess of it. It won’t improve markedly on day one of independence but a Scottish Government dedicated to improving Scotland (and the previous Executives, to some extent) has shown that it can be improved, even under the restricted circumstances of devolution and a government of whatever hue that gets its hands on the levers of economic management with Scotland’s best interests at heart will be a government that can set Scotland on a course for sustained economic improvement. It won’t be fast but it can be done.

We may carry deficits some years – as the UK does, and most other nations do – but we can carry surpluses some years, too. We may institute an oil and renewables fund to take long-term advantage of our natural resources. We may do a lot of things, but I think it’s clear that we actually do have the scope, the economic strength, the resilience, and the wit to be able to do these things for our own benefits. It’s not a fiscal argument, it’s about the economy, sensible, and we should have the courage to acknowledge that we’re as good as anyone else.

Alex Porter argued that the proper answer to the question “will an independent Scotland have a viable economy?” was “Who cares? What choice do we have?” I have a great temptation to agree with him, to agree that the UK is bust and broken and beyond repair, but I’ve also got a wee message of hope.

Not only will an independent Scotland have a viable economy, we’ve got it already, it’s functioning not too badly, it may be misfiring here and there from time to time but a wee tune-up and a decent driver and it can quite easily be purring its way along the highways and byways of the global economy, steering to catch Scotland’s best interests as it sees them. Spread good cheer, we’ve got a good economy.

Reproduced with kind permission from Calum Cashley.

Read Mr. Cashley’s blog here.