AS the Conservative leadership race intensifies and the candidates address hustings across the UK, including in Perth on August 16, business leaders and experts are calling for a “renewed and realistic economic strategy” that creates the right conditions for growth, driven by improvements in productivity.

Urgent action must be taken by the next Prime Minister to address long-standing challenges in weak business investment, innovation, and productivity growth while the pressing need to tackle spiralling energy bills as record cost and inflationary pressures force businesses to make difficult decisions affecting their future is growing.

Dr Liz Cameron, chief executive at Scottish Chambers of Commerce, said: “Firms are facing most danger from soaring energy bills, with the energy price cap expected to increase even further from October.

“The call from business is to introduce an SME energy price cap and cut VAT on energy bills from 20 per cent to 5%. The latter policy has already been floated in the Conservative leadership campaign and this immediate move would support businesses from the worst impacts.

“The next Prime Minister must act immediately and work with Scottish businesses ahead of the autumn Budget to help with the spiralling cost of doing business.”

At the Federation of Small Businesses, the organisation’s Scotland policy chair, Andrew McRae, warned that the next occupant of Number 10 “can’t just fixate on big business and the public sector”, noting: “About half of all private sector employment in Scotland is generated by smaller businesses. And more people are self-employed in Scotland than work in our NHS.”

Suggesting that the leadership debate so far has focused too little on strengthening local economies, he added: “Our next Prime Minister needs to get behind Scotland’s small business community. That means tackling spiralling energy bills as smaller firms neither have the protections of households nor the buying power of big business.

“It means helping smaller firms pay down billions of covid-related debt by getting the tax burden under control.”

Stuart McIntyre, professor of economics at the University of Strathclyde and head of research at the Fraser of Allander Institute, warned there is a risk that short-term pressures can lead to decisions that carry long-term scarring effects on the economy, but added: “Our economy can be remarkably resilient.

“Ultimately, the key driver of longer-term economic performance in the UK is improvements in productivity, and anything that slows that down, acts as a drag on improving our economic prosperity.

“There are short-term risks from the current pressures facing the economy, but the bigger issue is that the UK has had a well-documented challenge since the global financial crisis with productivity growth failing to come anything close to its historic average. This is a key reason why we’ve seen such muted wage growth and a stagnation in standards of living since the late 2000s.”

Referring to the feisty exchanges between candidates Rishi Sunak and Liz Truss over income tax, the recent national insurance increase and corporation tax, Prof McIntyre noted: “While pledging broad-based tax cuts in the midst of a cost-of-living crisis may be popular, and there is a compelling case to provide support to households and businesses facing steep increases in their energy costs, we shouldn’t mistake these for initiatives that will change the long-run path of the UK economy.

“The most important determinant of the performance of the UK economy over the next few years will be whether or not we see any meaningful improvement in the UK’s poor productivity performance.”

On the national insurance debate, Scottish Chambers’ Dr Cameron said: “Firms are facing a major crisis when it comes to hiring and retaining workers and sourcing the skills they need to survive and grow. Tax burdens on employers, like the increase in NI contributions, are an unhelpful decision and the next Prime Minister should seriously assess the economic effectiveness of this policy.”

She added that while not increasing corporation tax would be welcomed by firms, the immediate need is “still greater elsewhere”, noting: “Many businesses would not likely see any great benefit from corporation tax cuts, as they are already struggling to make ends meet and pay wages, as this policy is a tax on profits.

“Businesses are telling us that the real tax pressure is on the upfront business costs such as the non-domestic rates policy. Scottish and UK governments could provide real tangible support by reducing these upfront costs so that businesses have the ability to invest in their people and services.”

At the Scottish Retail Consortium, deputy head Ewan MacDonald-Russell said that the next Prime Minister will face a “veritable maelstrom of challenges when they take office” but warned: “Front and centre must be exploring how to keep down the cost of living and the cost of business.”