Swinney must take a bold approach to tackle challenges ahead

Last year, Scotland’s economy grew by just 0.1%. While the country has narrowly avoided dipping into a recession, the economy faces deeper economic challenges.

Despite the Scottish Government introducing social security measures to alleviate the effects of austerity, the entrenched structural inequities fuelled by the UK’s post financial crisis programme paved the way for the slowest economic recovery in over a century. Additionally, the economic demobilisation necessitated by the Covid-19 pandemic generated the deepest recession on record and shone a spotlight on structural injustices that predated the crisis.

Now, the cost of living crisis has worsened the squeeze on living standards. The UK is the only G7 member where household budgets have not recovered to pre-pandemic levels. Analysis from Future Economy Scotland has shown that median weekly earnings, adjusted for inflation, are lower today than they were in 2008. According to the Abrdn Financial Fairness Trust, nearly 450,000 households in Scotland are in serious financial difficulties. While the majority of households are using their heating less - with fuel poverty particularly acute in rural areas - large private energy firms and oil and gas giants reported record profits.

More broadly, Scotland’s economy is at a critical juncture. The country’s banking sector underwent a near-collapse, opening new oil and gas fields is incompatible with a inhabitable planet, rising interest rates are hampering an unsustainable housing boom, and consumer spending is in decline as prices and borrowing costs soared. The credit-fuelled economy that sustained Scotland in the early 2000s has long gone.

Despite this array of challenges, Scotland’s economy boasts a number of key strengths, including a world-leading universities sector and a highly-educated workforce; an abundance of clean natural resources; and global advantages in sectors like food and drink. But many of our largest sectors are either mature industries with limited scope for expansion or facing managed decline. Added to this is the longstanding problem of net outflows of income.

Many of our large sectors - like swathes of North Sea oil and gas licences - are foreign-owned. While production is based domestically, profits and dividends disproportionately flow to overseas investors. In 2021, figures reveal a net outflow of income from Scotland of approximately £10 billion, with national income roughly 5% less than the value of what we are producing.

This follows the Scottish Government's longstanding efforts to attract inward investment. The National Strategy for Economic Transformation (NSET), published in 2022, sought to make Scotland “a magnet for inward investment and global private capital”. Moving forward, First Minister John Swinney needs to look at introducing a revised approach which ensures inward investment does more to benefit Scotland. Levels of actual investment in Scotland and the UK have ranked among the lowest compared to other advanced economies over the past two decades, a problem which has been papered over by consumption, easy credit, and asset price inflation.

John Swinney has much to ponder on the economic front (Image: PA)

Boosting investment will not only be critical to increasing productivity and raising living standards, it will also be crucial to meeting just transition goals. To meet Scotland's 2045 net zero target, annual low-carbon capital investment is going to have to increase five-fold, rising from less than £1bn per year today to £5bn per year by 2030. Given the challenging fiscal outlook, it also means harnessing devolved tax powers to the fullest possible extent. Mr Swinney should start by examining options to replace the unfair and inefficient council tax with a more progressive alternative.

The Scottish Government’s decision to scrap its target of reducing emissions by 75% by 2030 represents a significant blow to its ambition to be a world-leader on climate action. Delivering net zero is not only a climate imperative, it is also Scotland’s greatest economic opportunity. As a matter of urgency, the Scottish Government needs to rise to the challenge and develop credible plans to decarbonise key sectors, particularly in areas like transport, agriculture, heating and buildings.

The causes and distributional impacts of climate breakdown are tied to structural inequalities. Future Economy Scotland research found that the carbon footprint of the richest 5% of households in Scotland was 4.1 times greater than the poorest 5% of households. The Scottish Government has recognised this through its commitment to deliver a just transition to net zero by 2045 - and if he is serious about tackling inequality, the new First Minister should put climate front and centre of his priorities.

READ MORE: Net zero targets rely on colleges to train workers

READ MORE: Why carbon footprint of Scotland's richest far outstrips the poorest

Doing so requires proactive steps to nurture domestic green industries to create well-paid, secure, unionised, green jobs; fairly sharing the costs and benefits of decarbonisation; and actively reducing social, economic and regional inequalities. At the heart of this is the need to ensure that impacted communities, trade unions, workers and businesses have a meaningful stake and say over decisions that affect them.

As it stands, much more needs to be done to ensure the wealth generated in Scotland is shared more broadly. After decades of UK privatisation and economic liberalisation, the prevailing economic model has funnelled wealth upwards, fuelling inequality and generating widespread economic inefficiencies.

Despite the obvious failures of this approach, there are already calls for the new First Minister to enact widespread tax cuts. Amid the sea of challenges we face, reheating failed economic ideas is not an option. Instead, we need to harness devolved powers to rewire Scotland’s economy. Governments around the world are looking to industrial policy to reinvigorate economies. The Scottish Government committed to developing a green industrial strategy which is one of many opportunities to break with business-as-usual and pave the way for a more sustainable, fair economic model.

As the Scottish Parliament and Government brace for another period of transition, it is important to remember that the challenges we face cannot be overcome with minor tweaks to the status quo, or by simply ameliorating the worst excesses of a broken economic model. Instead, we need a bold approach that rises to the challenges of the 21st century.

Miriam Brett is co-director of non-partisan think tank Future Economy Scotland