Scotland’s new first minister must move beyond old orthodoxies

Scotland’s new first minister must move beyond old orthodoxies

Scotland cannot transform its economy using the policy playbook from the 1990s. Whoever becomes Scotland’s new first minister will face no shortage of challenges. Lurking behind many of them lies a common cause: an economy that is not working.

Data published this week shows that Scotland’s economy shrank by 0.3% in February, leaving the country on the brink of recession. Economic downturns rarely spell good news for voters or politicians. But if the new first minister is to turn Scotland’s economy around, they must look far beyond immediate GDP figures.

In reality, Scotland’s economy is facing a profound series of interlinked challenges. Nowhere are the failings of the prevailing economic model more evident than in peoples’ paypackets.

Although the ‘cost of living’ crisis only started to appear in the headlines following the Covid-19 pandemic, it is anything but new. For the past 15 years Scotland – like the rest of the UK – has experienced an unprecedented squeeze on living standards. As shown in the chart below.

Scotland’s new first minister must move beyond old orthodoxies
Source: ONS

How did we get here? The causes of Scotland’s economic malaise are multifaceted. Throughout the 2000s, Scotland’s economy was fuelled by an over-extended financial sector, a lucrative fossil fuel sector, ballooning house prices, and (often debt-fuelled) consumer spending. But each of these proved to be fundamentally unsustainable.

The spectacular failure of Scotland’s banking giants has rendered the financial services sector a shadow of its former self. North Sea oil and gas is in decline, and extracting every last drop is incompatible with an inhabitable planet. Rising interest rates have brought the UK’s unsustainable housing boom to an abrupt end. And soaring prices and borrowing costs have weighed down on consumer spending. In other words: the economic model that sustained Scotland during the 2000s is broken.

Despite these challenges, Scotland’s economy undoubtedly has many strengths. But today many of our largest sectors – whisky, oil and gas, financial services, petrochemicals, professional services – are either mature industries with limited prospects for expansion, or facing managed decline. Many are also owned overseas by international investors – a consequence of the Scottish Government’s longstanding drive to attract foreign direct investment (FDI). While attracting high-quality inward investment can be beneficial, relying on it too heavily comes with a cost.

As Common Weal’s Craig Dalzell has highlighted, Scotland has experienced a net outflow of wealth every year since records began in 1998 – totalling around £277 billion between 1998 and 2021. Of this, £135 billion was extracted to the rest of the UK and £143 billion was extracted to the rest of the world. The only other advanced economies with similar levels of extraction are tax havens like Ireland, Luxembourg and the Cayman Islands.

Scotland’s new first minister must move beyond old orthodoxies
Source: Scottish Government

But while the Scottish Government boasts about the level of inward investment, the level of actual investment (gross fixed capital formation) remains among the lowest in the OECD, at 18% of GDP. For decades Scotland’s chronically low level of investment was papered over by exuberant consumption and rising asset prices. To meet Scotland’s net zero target, annual low-carbon capital investment will need to increase fivefold – rising from less than £1bn per year today to £5-6bn per year by 2030.

However, in recent weeks Scotland’s aspiration to be a global climate leader experienced a major setback. But while the decision to drop the 2030 net zero target is disappointing, it was not surprising. While ministers showed commendable leadership in setting ambitious targets, they failed to take the decisive action needed to meet statutory targets. Going forward, it is crucial that the Scottish Government doubles down on efforts to decarbonise key sectors of the economy. Delivering net zero is not only a climate imperative – it is also Scotland’s greatest economic opportunity.

Scotland’s new first minister must move beyond old orthodoxies
Source: Scottish Government, World Bank

With an abundance of natural resources and a highly skilled workforce, Scotland is well placed to prosper from decarbonisation. However, we cannot afford to assume that this will happen automatically.

Although Scotland has more than doubled its renewable electricity generation over the last decade, this has not translated into large-scale job creation. In 2010 the Scottish Government projected that 28,000 workers would be employed in the offshore wind sector by 2020. However, today only 3,100 workers were employed in the sector – just 11% of the total that was projected.

Does the Scottish Government have a strategy to overcome these issues? For the time being the answer is ‘no’. In March 2022, the Scottish Government published the grandly titled ‘National Strategy for Economic Transformation’ (NSET). But beneath the lofty rhetoric was an outdated strategy focused on attracting inward investment, in the hope that this will boost exports and innovation. Far from representing a strategy for transformation, it resembled a strategy for economic continuation.

There are some signs that change is on the horizon. In February 2024 the Scottish Government announced it would be undertaking a refresh of the NSET, and in September 2023 the first minister pledged to develop a green industrial strategy for Scotland. If made bold and ambitious, this provides an opportunity to break with the status quo and set Scotland’s economic model on a more sustainable and equitable path.

Whether or not this happens will depend on whether the new first minister embraces transformative change, or resorts to reheating old orthodoxies. Future Economy Scotland is currently undertaking a two year research project focused on developing the ambitious policies needed to deliver a just transition. We look forward to working constructively with Scotland’s new first minister – whoever they may be.

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