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Scotland's Economy: the case for independence

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Section 2: Advantage Scotland

Scotland's Resources

Scotland is energy rich to an extraordinary degree.

There are estimated to be up to 24 billion barrels of oil to be extracted from the North Sea, although some industry experts believe this figure could be higher[9].

Scotland is already one of the best places in the world to invest in renewable technology. We have 25% of Europe's off-shore wind and tidal resource and also 10% of Europe's wave resource.

We already generate more than one-third of our electricity needs from renewables.

We are a world-leader in the fast growing green technology sector.

Scotland's Global Reputation

We have an international reputation for producing quality goods and services. Our food and drink sector has a turnover of more than £12 billion.

We have a tourism industry which employs almost 200,000 people and our country is famed across the world for its beauty and hospitality.

We are world-class at attracting inward investment and have a growing network of business ambassadors.

Scotland's Ingenuity

Scots have been among the greatest entrepreneurs and innovators the world has ever seen.

Scotland is home to a thriving cutting-edge life sciences sector.

Our innovators are responsible for pioneering the ATM, Dolly the Sheep, MRI scanning, penicillin, television and many other world-renowned inventions and discoveries.

We have a creative industries sector with a turnover of £4.8 billion[10].

Our manufacturing sector exported £14.7 billion in 2011[11].

There are few other countries on earth with a better combination of those advantages, resources and talent.

A committed European nation

The current UK Prime Minister has said that, if his party forms the government after the next Westminster general election, he will hold an in-out referendum on the UK's membership of the EU.

The Scottish Government's position is that an independent Scotland should remain inside the EU. Being part of the EU single market - of 500 million consumers - is one of the factors that makes Scotland attractive to inward investment.

Following a Yes vote in the independence referendum, the Scottish Government will notify the EU that it intends to remain inside the EU as an independent member state.

Negotiations on the terms of that membership would then commence and take place in parallel with negotiations with the UK government, with a view to Scotland becoming independent in March 2016.[12]

With our resources, history in Europe and commitment to being a constructive partner in European affairs, no-one has seriously suggested that Scotland's continued membership would not be welcome. Graham Avery, senior member of St. Antony's College, Oxford University, and Honorary Director-General of the European Commission, has said: "For practical and political reasons, the idea of Scotland leaving the EU, and subsequently applying to join it, is not feasible." And he has added: "From the political point of view, Scotland has been in the EU for 40 years; and its people have acquired rights as European citizens."[13]

Professor James Crawford, who co-authored a paper for the UK Government on an independent Scotland's international status said the Scottish Government's 18 month timescale for concluding discussions with international organisations, such as the EU, was "realistic"[14].

Education in our DNA

Independence offers Scotland an opportunity to fully mobilise its resources. We recognise that the skills and industries of today will not necessarily be the same as those of tomorrow. That is why we are already building the foundations of our future workforce through our world-class educational system. With full powers, we will be able to adapt and enhance our approach founded on:

  • investment in early years. This is fundamental both for improving individual opportunity and building a stronger society and workforce;
  • equipping our young people for the 21st century through the Curriculum for Excellence (CFE);
  • continuing to support our universities. We have more in the global premier league per head of population than any other nation. These universities are an important economic asset for Scotland, as they provide the highly-skilled graduate workforce needed for the future;
  • ensuring that education continues to be free - a core Scottish value;
  • continuing our investment in Higher Education Research and Development (HERD) which is at world class levels - the latest official statistics show that, in 2011[15], Scotland's HERD expenditure as a percentage of GDP ranked first compared to the other countries of the UK and in the top quartile of OECD countries;
  • ensuring all post-16 learning is structured with a system-wide focus on jobs and growth which is more aligned with the demands of business; and
  • delivering record numbers of modern apprenticeships and training places, while making an explicit commitment to Opportunities for All: offering a place in training or education for every 16 to 19 year old in Scotland who is not in work.

Our Growth Sectors

Our Economic Strategy identifies our growth business sectors. Below we set out the reasons for identifying them as such and highlight their current strengths and their potential for growth. With independence, these sectors could benefit in a number of ways, and this is explained in section 4.

Life Sciences

Scotland has a global reputation in life sciences. Discoveries such as Interferon, the P53 cancer suppressor gene and the cloning of Dolly the Sheep have given Scotland a strong international footprint and have had a major impact on modern healthcare.

For example, the Jones Lang, Lasanne Life Sciences Cluster Report, Global 2011 says: "Edinburgh is a hotbed of life sciences innovation, with particular achievements in recent years in the field of stem cell research. The Queen's Medical Research Institute brings together four world-class research centres specializing in Cardiovascular Science, Inflammation Research, Reproductive Biology and Regenerative Medicine."

The Highland Diabetes Institute is also a unique model, pioneering cutting-edge research through a partnership between a:

  • commercial company - LifeScan Scotland Ltd., Inverness is the home for the worldwide diabetes research and development into blood glucose monitoring carried out by the company;
  • academic institution - University of Highlands and Islands Department of Diabetes & Cardiovascular Science; and,
  • national health provider - NHS Highland Diabetes Centre.

These organisations, working together, are at the forefront of diabetes expertise in promoting high standards of diabetes patient care, teaching, the pursuit of scientific and clinical research, and in the development of medical devices.

The individual partners operate independently within the Highland Diabetes Institute but by bringing them together under one roof they can benefit from collaborating with one another on topics of mutual interest.

The life science sector makes a significant contribution to the Scottish economy. In 2012 the sector provided employment for around 32,500 people in 650 companies and organisations[16]. Turnover in 2010 is estimated at around £2.9 billion, with gross value added (GVA) at around £1.5 billion[17]. Sub-sectors such as medical technology (medical devices and diagnostics) and pharmaceutical services have seen particularly strong growth over the past 10 years.

Our ambition to double the economic contribution of life sciences to the Scottish economy by 2020 is captured within the refreshed Scottish Life Sciences Strategy, "Creating Wealth, Promoting Health".

Creative Industries

Scotland's creativity is recognised throughout the world and we have a strong international reputation for excellence. In 2010, the creative industries in Scotland had turnover of £4.8 billion and contributed £2.7 billion of GVA to the Scottish economy[18]. The sector employed 64,000 people in 2011, and exports represent around 5% of Scotland's total international exports[19]. Scottish art, film, fashion, music and literature are well recognised, as are Scotland's design, IT and computer gaming industries. Films, such as World War Z and Skyfall, take advantage of our landscape as a film location. The animated feature Brave was also set in Scotland's characteristic Highland landscape and formed the centre of a major tourism campaign.

Scotland has a wealth of museums and galleries presenting world class and diverse collections attracting visitors from around the world. The Scottish Government contributed over £15 million[20] to a £47 million transformation of the National Museum of Scotland, which, once opened has become the most visited attraction in Scotland[21] (9th in UK) with just under 1.9m visitors in 2012. We are also being increasingly recognised as the home of festivals which not only act as a magnet for international visitors and performers but contributes significantly to our economy with Edinburgh Festivals generating tourism revenue worth £261 million in 2010[22].

Our vision for Scotland's creative industries is one which blends Scottish Government support with the industry's passion to contribute to sustainable economic growth. The sector has grown rapidly over the past 10 years, and with appropriate support has potential to grow further.

The Scottish Government, for example, has long championed tax incentives for Scotland's games industry - a global success story with close links to our universities.

Scotland's Digital and ICT Industry: A Networked Nation

The Scottish ICT sector currently employs around 47,000 people, and makes a direct contribution of £3.6 billion per annum to the Scottish economy.[23]

Scotland has a strong digital and ICT foundation in areas such as:

  • big data
  • digital health and care
  • smart mobility
  • sensor systems.

Inward investment is attracted by the skills we can offer and the quality of the research taking place in our leading universities. It has been estimated that the IT and Telecoms sectors require 9,600 new entrants each year over the next few years, making them one of the most vibrant sectors of the economy.

Our vision is to ensure that by 2020, Scotland enjoys a world-class, future proofed digital infrastructure[24]

An independent Scotland would have the opportunity to use new regulatory powers to ensure that we meet the connectivity needs of both our rural and urban areas, by setting coverage obligations for providers that reflect the unique demands of our population.

We also need to ensure that our commitment to developing connectivity is matched by action to promote digital participation, stimulate the digital economy and deliver high quality digital public services. Everyone -- individuals and businesses -- should have the confidence, capability and skills to make best use of digital technologies and to take full advantage of the benefits a digital economy can bring.

We are on the cusp of a new digital revolution which will transform economies around the world. We want Scotland to be at the forefront of that revolution and to have cemented its place as a world-class digital nation by 2020.

North Sea Oil and Gas - "a fertile landscape for investors for many years to come."

In 2011, oil and gas production contributed £26 billion to Scottish GDP.

The sector is also a major exporter, with exports of oil, gas and petroleum products boosting the UK balance of payments by an estimated £40 billion in 2011[25].

Analysis by Professor Alex Kemp of Aberdeen University estimates that, when Scotland's share of the UK Continental Shelf (UKCS) is demarked using the median line, it accounted for 96% of UK offshore oil production and 52% of offshore gas production in 2011. This resulted in Scotland accounting for an estimated 78% of total UK hydrocarbon production in 2011[26].

Scotland's estimated geographical share of UK offshore tax revenue is larger due to the prevalence of oil production in the Northern North Sea which is relatively more profitable. Scotland's geographical share of oil and gas production is estimated to have generated £10.6 billion in tax revenue during 2011-12, 94% of the UK total.

Recently there has been a large increase in investment in the North Sea, reflecting the industry's confidence that there are many more years of revenue to come. Between 2011 and 2012, total North Sea oil and gas investment increased from £8.5 billion to over £11 billion, the highest level for 30 years. An even higher level of investment of over £13 billion has been forecast in 2013.[27]

In fact, companies are thought to be planning to invest an extra £100 billion in future years.

The latest oil and gas licensing round has been described as a "bonanza" by the UK Government, which says the North Sea will remain a fertile landscape for investors for many years to come[28].

Some estimates say reserves could now be in excess of 24 billion barrels. Previous analysis by the Scottish Government suggested remaining reserves could have a wholesale value of £1.5 trillion. Indeed, on an internationally comparable basis, Scotland is estimated to have the largest reserves of oil in the EU, accounting for 60% of the EU total[29].

So the question for Scotland is not whether oil and gas will continue to generate significant economic benefits for many years to come - it is whether we will have the power to steward these resources for our current and future generations.

An oil stabilisation fund

As an independent country, Norway has been able to use its oil wealth to establish an oil fund, now worth close to £450 billion, equivalent to approximately £90,000 per person. Our vision is of a Scotland that has the freedom to make the decision on how our oil wealth is distributed in a way that reflects our country's needs. There is still an opportunity to set up a fund to take advantage of the tax revenue that will accrue from the 24 billion barrels of oil that could still be extracted from Scottish waters.

The independent Fiscal Commission Working Group has set out a number of recommendations and proposals including in relation to a Scottish oil fund:

"In principle, the Working Group sees clear merit in investing at least a proportion of the receipts from North Sea revenues into an Oil Fund to invest for future generations. This would ensure that a share of the wealth generated from oil production is transferred to a separate fiscal account where it can be saved and invested over the long-term. This is the approach which has been adopted in Norway.

"Adopting this strategy historically would have allowed the Scottish Government to establish a significant asset base. For example, if the Scottish Government had the opportunity to invest the net fiscal surpluses achieved since 1980 it could have accumulated assets equivalent to between 62% and 84% of GDP."

The Working Group recommended that The Scottish Government should seek, in principle, to establish a stabilisation fund to help manage its natural resources and to enhance future economic resilience.

In the short-run, such a mechanism could be established even if there is borrowing. The fund could be used to smooth expenditure and borrowing during economic shocks. The Fiscal Commission Working Group recommended that:

"An attractive approach in the short-term would be to plan the government's spending plans on the basis of a cautious forecast of oil revenues produced by an independent fiscal commission. Then, if oil revenues exceed the forecasts, the excess could be transferred into a stabilisation fund."

Drawing on Scotland's financial strengths relative to the UK, such an approach would offer a credible way to ensure predictability in the budget process and in the setting of policies and spending programmes.

Scotland's Renewable Resources: a powerhouse of Europe

In July 2012, the UK Department for Energy and Climate Change (DECC) published figures on renewables investment and jobs, which showed there were £2.3bn of renewables projects announced in Scotland between April 2011 and July 2012, with an associated 4,600 jobs.

Scotland is already one of the best places in the world to invest in renewable technology. We have 25% of Europe's off-shore wind and tidal resource and also 10% of Europe's wave resource.

We have greater energy security than the UK (in terms of spare generation capacity) and we will help the UK to meet its legally binding renewable energy target.

In October 2012 OFGEM estimated the UK's capacity margin will reduce to 4% by 2015/16[30]. Without the excess generating capacity from Scotland the Scottish Government estimates it would be at zero. An updated estimate is due from OFGEM in June which is expected to show a further tightening of capacity margins due to recent fossil fuel plant closure announcements by generating companies.

In contrast the Scottish Government estimates that Scotland's hypothetical capacity margin will be 25% by 2015/16. OFGEM continue to highlight the challenge that the UK faces in keeping the lights on, and Scotland's generation capacity is a key part of meeting that challenge, especially since our European neighbours face similar capacity issues, meaning the UK cannot therefore rely on capacity from outside the UK system.

Europe's Energy Commissioner, Günther Oettinger, said in a recent speech in Aberdeen: "In the last 50 years, North Sea oil and gas have powered growth in the UK and beyond. In the future, wind, wave, and tidal energy could make Scotland a power house of Europe[31].

"Scottish energy means trade for Scotland. Electricity from here goes via England to the Continent. And with the European North Sea Offshore Wind Grid, Scotland could be linked into a Europe-wide network."

We are already working hard to fully exploit this huge potential. We have launched the Grand Challenge phase of the Saltire Prize - the largest marine energy challenge prize in the world.

At this time, there are more wave and tidal power devices being tested in the waters off Scotland than in any other country in the world.

Importantly, the skills and expertise which have made the North Sea Oil and Gas industry such a world-class success can be harnessed to drive the renewable sector. We have knowledge of engineering in hostile, deep-water environments which has few rivals anywhere in the world.

We are now starting to see the benefits and fruits of collaboration between the industries. An increasing number of oil and gas companies, such as Subsea 7, Technip and the Wood Group, are entering the offshore wind market. The Scottish Government is confident that the knowledge and expertise from oil and gas will be a huge competitive advantage to the marine industry of renewable technologies.

SCOTLAND'S LOW CARBON ECONOMY

In 2007-08, Scotland's low carbon market was worth around £8.5 billion (8.5% of our economy) and is forecast to rise to around £12 billion by 2015-16;

Low carbon sector jobs could grow by 4% a year to 2020, rising from 70,000 to 130,000, over 5% of the workforce;

Offshore wind alone could bring in around £30 billion of inward investment, and up to 28,000 jobs; and,

Sales of off-shore electricity could value £14 billion by 2050; equating to £2,700 for each person in Scotland.

Source: The Government Economic Strategy: 2011

An independent Scotland can ensure that all of Scotland benefits from maximising the potential that our renewable landscape has to offer.

A low carbon economy

Present conditions, while challenging, offer enormous hope for achieving a low carbon economy. To clarify the future path of our economy, the Scottish Government has committed to four transformational changes:

  • decarbonise electricity generation by 2030 and largely decarbonise the heat sector by 2050;
  • almost completely decarbonise road transport by 2050;
  • significant decarbonisation of rail by 2050; and
  • establish a comprehensive approach to ensure that carbon is fully factored into strategic and local decisions about rural and urban land use.

The Scottish Government has set itself stretching interim targets:

  • the equivalent of 100% of Scotland's demand for electricity to be met by renewables by 2020;
  • end use energy consumption to reduce by 12% by 2020; and
  • 11% of heat demand to be met by renewables by 2020.

The transition to a low carbon economy will help us become more resilient and support economic recovery and provide us with a platform for greater international trade. Taking the opportunity now means lowering costs in the future: both in terms of future costs of carbon and lost growth opportunities as other countries embrace low carbon objectives. Taking early advantage of low carbon opportunities will support future growth by creating opportunities for Scotland's businesses to export their products and expertise to other nations.

Food and Drink: World-class quality

Scotland is a land of food and drink. We have some of the best natural produce in the world. The food and drink we rear, grow and make stands for quality, for beautiful unspoilt landscapes, clear air, pure water and all the traditions of good husbandry. People around the world attach these values to food and drink from Scotland. They know that our Scotch beef and lamb, our excellent seafood, such as langoustines, scallops and salmon, our staple crops, and our soft fruit are second to none.

That is why this sector is an outstanding success and a key contributor to the Scottish Government's ambition to increase Scottish exports by 50% by 2017. The facts speak for themselves:

  • Food and Drink[32] exports have grown 50% since 2007, reaching £5.38bn in 2011, and making it one of the biggest export sectors.
  • Turnover in the food and drink growth sector[33] has been estimated at £12.4bn for 2010.
  • Between 2007 and 2012, retail sales of Scottish food and drink brands across Great Britain have increased by 28%.
  • Scotland is the world's third largest salmon producer[34].
  • We land 60% of the UK's fish[35].
  • We have more than one quarter of the UK's beef herd[36].
  • 40 bottles of whisky are reported to be shipped overseas each second[37].

Food and drink manufacturing comprises around 835 businesses[38], including strong indigenous players with key brands, global players with significant inward investment and many smaller firms with a strong heritage, innovative products and the potential to grow. Our strength lies in a diverse company base across a wide product range.

Manufacturing Success

From luxury fabrics through to innovative engineering, Scottish manufacturing companies excel in quality. The manufacturing sector had total international exports of £14.7 billion in 2011, accounting for 61 per cent of Scotland's total international exports.[39] The manufacturing sector's international exports in 2011 were up by
£1.1 billion from the previous year[40].

The Scottish Government firmly believes that science and engineering are key to creating a more successful Scotland. To lever this potential, we need a workforce with the skills and capabilities required to meet the existing demands of the industry and the innovative creative talent to shape new markets in our economy.

Manufacturing needs continual investment at a high level to ensure that the pipeline of new discoveries and products continues. To achieve this requires improving routes to sources of private and public investment. Scotland is strongly committed to using public finance alongside much-needed private investment. Scotland already has a strong business angel investment community, coupled with the Scottish Investment Bank (SIB), which currently supports the sector.

With the full powers of an independent nation, we could increase our competitive advantage by ensuring Scottish manufacturing is better 'tuned' to domestic and international demand. Access to a full array of economic levers would place us in a much better position to take advantage of growth, export and job creation opportunities.

Given the importance of manufacturing for exports, innovation and the quality of its workforce, governments in an independent Scotland would be able to decide whether to use the tax system and other economic levers to boost incentives for growth companies and to encourage innovation.

Financial and Business Services

The financial and business services industry is one of the growth sectors identified as providing an opportunity to strengthen Scotland's areas of international comparative advantage which has the capacity to boost productivity.

Scotland is internationally recognised as the most important UK financial centre outside London and the South East, with a breadth of services including global custody, asset servicing, banking, investment management, corporate finance, general/life assurance and pensions.

Scotland remains an attractive and highly competitive location for both indigenous and international businesses, and recent announcements of expansion and investment plans by financial services companies have buoyed prospects for the future.

The Scottish Government, the wider public sector and the financial services industry itself continue to show commitment to work in partnership through the unique collaboration of the Financial Services Advisory Board (FiSAB) to ensure that Scotland is recognised as a successful international financial services centre.

The recently published Scottish Government banking strategy, "Sustainable, Responsible Banking: A Strategy for Scotland"[41], sets out what the Scottish Government considers to be the key principles of a healthy, diverse and competitive banking sector in Scotland. It outlines a range of measures that can be taken in the current environment to encourage diversity in the sector and to restore traditional Scottish banking principles of professionalism, stewardship and prudence.

Our aim for financial regulation in an independent Scotland is for:

  • a thriving financial service sector as part of a balanced economy. Scotland's financial services will be the gold standard; and,
  • the right services available to all of Scotland's people. This will go beyond big high street banks, and include credit unions and, potentially, new forms of finance, and pensions.

Independence opens the opportunity for Scotland to create a successful financial sector that meets the needs of consumers and businesses. This will make a significant contribution to Scotland's sustainable economic growth and assist in tackling inequality and boosting prosperity.

We want to develop a diverse, competitive financial services industry that is responsive to the needs of its customers, that understands its wider role in society and that behaves accordingly. A properly regulated and functioning financial system can play a key part in delivering this ambition.

Recent events in the global economy show this can only be achieved when effective use of regulation and supervision is combined with a positive culture focused on responsibility, stability and the wider economy. This approach is fundamental if we are to return to a banking system based on stewardship, prudence and probity.

Tourism - welcoming the world

Scotland's beauty, magnificent attractions and hospitality are famed across the world. Tourism is one of Scotland's most important sectors, directly contributing
£2.9 billion GVA[42] annually to the economy. It employs almost 200,000 people in almost 14,000 diverse businesses, accounting for around 8% of employment in Scotland[43].

2014 is due to be one of the biggest years in Scottish tourism's history as we prepare to welcome the world to visit Scotland for the Commonwealth Games, the Ryder Cup and Homecoming Scotland. Staging these major events in Scotland leaves no doubt of the firm foundations we have to build upon.

Overseas tourism contributes significantly to our earnings; therefore boosting tourism would make a positive contribution towards meeting our export target.

Scottish tourism has faced a challenging time through the recent economic recession, but remains resilient. The latest performance figures are:

Overnight visitors spent £4.29 billion in Scotland in 2012. Of this figure, the British market is worth £2.89 billion. 15 % of visitors are from overseas, spending £1.4 billion.

The value of 'daycations', day tourism trips without an overnight stay, measured in 2011 by VisitScotland is estimated to be £4.6 billion[44].

The Scottish Government is committed to creating an environment in which businesses have an opportunity to flourish, underpinned by a fair and efficient taxation system.

The UK Government's Air Passenger Duty (APD) is making Scottish airports uncompetitive in their efforts to attract new direct international routes and adds significantly to the cost of flying to and from Scotland. UK APD is the most expensive aviation duty in Europe, and the UK is ranked second lowest in the world in terms of competitiveness of ticket taxes and airport charges. A tax regime of this kind may be justifiable in terms of seeking to reduce pressure on overcrowded airports in South-East England. It is difficult to justify with regard to Scotland's circumstances - an example of UK fiscal policies not being appropriate to Scotland.

In an independent Scotland, a competitive Scottish aviation taxation regime could stimulate new and existing direct international services, important for business connectivity, by reducing disincentives to fly to Scotland. There is strong support across the industry for the devolution of APD, including from our 4 largest airports.

An independent Scotland could also choose to follow the example of many EU countries by adjusting the VAT rate to help tourism. The UK imposes one of the highest rates of VAT in Europe. 23 of the 27 EU countries currently offer some form of reduced VAT rate to their hospitality sectors. With the ability to adjust VAT rates, we could choose to follow suit.