Richard Leonard: This is how we can fix Scotland's broken economy

A Scottish economics education, five years working as an economist, followed by 20 years representing working people at the point of production in Scottish industry has afforded me a rare insight into the relationship between economic theory and practice.

By The Newsroom Friday, 14th September 2018, 8:03 am Updated Friday, 14th September 2018, 8:35 am

Scottish Labour Leader Richard Leonard. Picture: Greg Macvean

It has also fired up my passion to bring about a real change and a radical rebalancing of power in the Scottish economy.

That’s why I was pleased to read two eagerly awaited reports on the future of the economy just published. The Institute for Public Policy Research’s (IPPR) distinguished Commission on Economic Justice provides a radical and visionary plan for delivering change in a post-Brexit economy and the David Hume Institute’s (DHI) “Scotland’s Productivity Challenge” stimulates debate around a very practical agenda for change.

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They complement and reinforce each other. Both reports serve as useful reminders of the importance of clarity in debate. The DHI report begins as it means to go on, “A country’s productivity is the single most important determinant of its average living standards and wealth.” The IPPR make a similar point “poor productivity ... holds back growth and holds down wages”.

More than a quarter of a million Scottish workers regularly work more than a 48-hour week (Picture: Ian Rutherford)

And both recognise the importance of long termism. So, the IPPR’s Commission notes that “the economy needs fundamental reform”, as the “weaknesses in productivity, investment and trade go back 30 years or more. They will not be addressed by incremental change or trying to ‘muddle through’.”

This is refreshing. The challenges we face are deep-seated and they demand a new radicalism and vitality.

There have, after all, been far-reaching changes to our economic structure over the last three decades. We have shifted from being a nation of producers to being one of consumers. We have witnessed a continued contraction of manufacturing jobs and the total collapse of entire industries like mining.

We have seen the emergence of a service-led economy and a consequent impact on our balance of trade and our national accounts, but also at a human level on working lives and the sustainability of local communities too.

And we have seen a transformational loss of economic and industrial ownership and control from Scotland which has strained and broken accountability in our economy even further.

Telling in the reports is an analysis that despite a high level of skills in the workforce and favourable terms of trade – we sell exports at relatively high prices compared to the imports we buy – our labour productivity and our labour force is being let down because we have low capital stock, that is we have low levels of business investment in machinery and equipment.

Intriguingly, the IPPR conclude that low capital investment is exacerbated by the growth of the low-wage, precarious employment economic model. Business owners getting caught up in a downward business spiral of low pay, low investment, and low productivity.

Productivity in simple terms is measured as GDP per hour worked. The long hours culture is one of the reasons why both productivity and the quality of life is dragged down.

One suggestion to tackle this is better parental leave entitlement and more holidays. I would not argue with this. But it is also long overdue that we revisit the UK opt-out of the European Union Working Time Directive, which means in Scotland alone more than a quarter of a million workers regularly work beyond a 48-hour week. We need to break away from this long hours’ culture, not only for the sake of our productivity, but also for the sake of our health, and health and safety.

The answer to the productivity challenge and many other industrial questions from the political right is invariably tax cuts. But there is a sleight of hand here.

Whilst the Tories have cut corporation tax from 26 pence to 19 pence, they have put up regressive taxes like VAT from 17.5 per cent to 20 per cent – hitting the poorest the hardest. So, there has been a redistribution of income and wealth, but just in the wrong direction.

Moreover, both reports eschew this tax-cutting agenda. The IPPR concludes “there is in fact little evidence that investment levels are significantly influenced by corporation tax rates” – pointing to much higher rates in much more successful economies. The DHI’s finding is that the answer to Scotland’s productivity challenge is not to be found in tax cuts, but business research and development, investment in a stronger indigenous business base and better management.

And they make clear that the Scottish Parliament already possesses significant powers to influence long-term economic performance, including education, health, housing, planning, transport and economic development.

At the start of this year, the Scottish Government published its assessment of Brexit’s effect on Scotland. Productivity was singled out as the largest factor in the reduction in our GDP, expected to contribute a 5.8 per cent drop in economic output.

And there is little doubt that Brexit should inject some added urgency to tackle the long-term problem of Scotland’s productivity gap.

It only serves to reinforce this need for a step change in how we do things. If we do not make this change in the context of Brexit, we will simply drift even further from the high-skill, high-wage economy Scotland needs. Increasing the level of productivity is key to achieving sustainable economic development, to raising incomes and to creating better quality jobs.

Scotland is one of the better performing parts of the UK by measure of productivity, but it is still below the UK average.

Much of the debate in the Scottish Parliament is regularly focused on what powers the current Government does not have rather than the ones that it does.

The Scottish Parliament already possesses significant powers to influence long-term economic performance. It is high time that at long last they were used.