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Resilient Scotland Part One - Post-Lockdown Until Scottish Elections

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Common Weal

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Common Weal launches the first part of its economic recovery plan, showing how Scotland can become a productive, high-wage society without government bailouts by letting Scottish businesses unlock Scotland's underdeveloped potential. It explains how by focussing on reprofiling public procurement and using public stimulus in housing, energy, land, food, advanced materials and light manufacturing to achieve green reindustrialisation we can replace low-pay service sector jobs that are being lost because of the pandemic with high-pay manufacturing jobs.

You can download the full report here.

You can read a shorter summary version of the report here.

This is the first of three parts of the over all plan which sets out the strategy and then the actions which can be taken between now and the Holyrood elections in 2021. Part two will cover the four-year period of that Parliament and part three will cover the longer-term shift into a Green New Deal. Annex 1 contains a full Q and A on the report.

Called Resilient Scotland and following on from the launch of the Resilience Economics report which provides the underpinning economic theory, the plan is based on sound business models for new and expanded industry sectors rather than on public bailouts or grants. To achieve the necessary investment without bailout it calls first for two existing devolved powers to be increased (both possible with the stroke of a pen) and one existing policy to be redesigned:

The borrowing cap for the Scottish Parliament should be removed or lifted substantially so public expenditure can be used where needed; but, more importantly
The Scottish National Investment Bank should be given full dispensation to act as a bank and thus capitalise from sources such as pension funds and lend to the public as well as private sector.

Public procurement should be entirely reprofiled with the public policy goal of supporting Scottish business and achieving the maximum number of manufacturing jobs.

This unlocks many billions of pounds of investment for the Scottish economy with little or no additional burden on taxpayers. This should then be directed strategically via a national industrial strategy to create high-pay design, primary production, manufacturing and processing jobs to replace the low-pay service sector jobs that are being lost. This not only creates major economic stimulus and reduces low pay and poverty it also speeds up the greening of Scotland's economy and creates much more resilience in an economy much less reliant on importing.

The sectors on which the industrial strategy should focus are all in the field of green reindustrialisation based on Scotland's abundant natural resources. These are:

Food. If public procurement is reprofiled so 'public kitchens' (the food bought by all public sector agencies) buy in a way that provides ongoing security for domestic businesses (existing or new start) it will enable them to scale up production with confidence. Attached to a Good Food Nation development policy, this can provide a foundation for substantial expansion in food growing and processing in Scotland. Steps to provide better market access to domestic customers will accelerate the transition to a Good Food Nation.

Materials manufacture. Scotland has the lowest level of forestry in Europe but the highest potential for this industry. Materials crops (particularly wood but also crops like bamboo and hemp) form the basis of modern green advanced materials like cross laminated timber, insulation products, bioplastics and hempcrete. If supply chains are integrated through an industrial strategy these can provide high-quality, ethical, domestically-produced source materials for the replacement of unsustainable imported construction materials and to stimulate a light manufacturing sector.

Light manufacturing. At the moment Scotland imports large volumes of low-quality light manufacturing which ends up in landfills – and billions of pounds of this is bought by the public sector (for example furniture and equipment for schools, medical supplies for the NHS and stationary for local authorities). The development of a light manufacturing sector based on advanced ethical materials can be stimulated and supported by public procurement.

Housing. High-quality public rental houses with low rents can be built without subsidy (Common Weal recently published a policy paper explaining how). The public sector can build as many of these as there is demand and, if targeted at medium-sized domestic businesses, guaranteed order books can be used to support these businesses to transition to green off-site building technologies and to develop and support domestic supply chains of ethical construction materials (only 20 per cent of the construction materials used in Scotland are sourced here).

Energy. Scotland has failed to capture almost any of the manufacturing jobs linked to our renewable energy resources. This can be changed quickly by setting up a National Energy Company and developing all remaining large-scale renewable energy opportunities in collective ownership, commissioning the manufacturing from Scotland. The industrial strategy should also aim to capture as much of the supply chain in Scotland as possible.

Hydrogen. Far from being green, commercial hydrogen is currently produced chemically in a way which emits carbon dioxide. Clean hydrogen is made by running an electric current through water and is currently inefficient. To develop this industry requires a nation with a lot of spare electricity capacity, a strong record of science and engineering and willingness to invest for the long term to achieve the process and engineering improvements needed. That nation will take a global lead in the emerging hydrogen industry and nowhere is better placed than Scotland to be that nation.

Land. All of this is possible because of the underdevelopment of the Scottish economy and in particular the poor use of our land and other natural resources. Fuelling almost all of the above will be land-based industries which themselves represent tens of thousands of potential jobs, with many of those in rural Scotland. However, this can only be achieved equitably if there is substantial land reform so that land-based businesses can gain access to the enormous proportions of Scotland's land which is currently used unproductively. Scotland's seas, if responsibly managed, are also a great source of natural resources.

Design and innovation. All of the above are reliant on a new era of advanced environmental design and cutting edge science and engineering, all of which will create new high-quality jobs, all of which are areas of excellence of Scotland's higher education sector.

This provides the basis of an emergency industrial strategy which should be developed immediately and leads into a medium- and long-term transition into a full Green New Deal for Scotland which will stimulate many billions of pounds of new and ethical economic activity in Scotland, all of which creates high-pay employment. It will take the four years of the next Scottish Parliament to fully begin that transformation but if that is to happen progress must be made immediately. The plan proposes three immediate actions to ensure that progress:

A Transition Academy to support the civil service and others in the public sector to learn and understand this new approach and to make sure that a culture of 'how we've always done it' does not undermine this transition.
A Diversification Agency to work with micro, small and medium-sized businesses and potential start-ups to alert them to the opportunities available and to help them change, expand or build their business to grasp those opportunities. This will involve linking them with public procurement, skills development (see below) and innovation consultancy (particularly through universities and colleges).
A Retraining Guarantee for anyone who has lost their job. Working with universities and particularly colleges, training needs for this new economy would be identified and training packages would be developed. These would then be offered to anyone who has lost a job (or to young people locked out of the job market) because of the economic impact of the pandemic.

However, the scale of the impact of this crisis means that there are some strategically-important economy sectors which will need direct support. In particular, hospitality, entertainment, tourism and the arts are all crucial to the wellbeing either of particular regions or the entire nation (and often both) and all will be hit by the impact of the virus. A number of specific rescue and support packages is therefore also proposed (these will have a direct impact on the taxpayer but the impact on the taxpayer of inaction may be worse):

To support the tourism sector and to encourage a long-term shift to a greater proportion of domestic tourism, every person in Scotland should be given a £100 voucher towards a stay at an independently-owned hotel or guesthouse in Scotland.
To support the hospitality sector everyone should also get a £30 voucher to spend in an independently-owned restaurant.
To support the arts sector a form of Universal Basic Income for artists should be introduced and the arts sector should be encouraged to use this stability to generate a outpouring of new work as restrictions are eased
To support the events and entertainment sectors a proposal for a Festival of Scotland (spread across the country) should be developed for when one is again possible.

Finally, there are two areas of immediate concern which should be addressed. We should aim to avoid the loss of viable businesses wherever possible and we should take steps to avoid the damaging impact which would come from large-scale house repossessions in Scotland. While the report is very sympathetic to a Universal Basic Income to help achieve this it is impossible at the Scottish level and unlikely at a UK level. Hence the need for alternative approaches:

A mortgage to rent scheme should be developed. Anyone at risk of losing their family home as a result of loss of employment or a failed business should be able to request that their mortgage should be converted into safe, reliable and long-term guaranteed public rent. To do this groups of applicant mortgages which will otherwise default should be grouped and the Scottish National Investment Bank should then negotiate their purchase from the banks. They would negotiate hard and banks would be expected to take a substantial 'hair cut' on the value of the mortgage. Allowing for mortgage already paid, this means families can stay in their homes and their communities with much more affordable housing costs. This will also balance the need to control house price inflation while preventing the risk of a market collapse.

There are many businesses (particularly in hospitality) which remain perfectly viable in the medium term but which cannot trade in the short term and the biggest risk to these businesses is debt and in particular rents. A convert to public landlord scheme similar to the mortgage to rent scheme should be explored with commercial property being taken over by the Scottish National Investment Bank with reduced rent or rent holidays used to sustain businesses.

Annex 1: Q&A

What do you mean by a Resilient Scotland?

A Resilient Scotland is one which provides sufficiency and security to all; that people have what they need to live good lives now and the confidence to know they will still be able to live good lives whatever comes next. That needs three elements. A Resilient Economy is one which creates good jobs with security, is productive and useful and makes much more of what we need domestically, that uses natural resources effectively but responsibly and which does not fall over or require massive bailouts every time an economic shock hits it. A Resilient Society is underpinned by strong, cohesive communities with first rate physical and social infrastructure, where participation is high and public services well-resourced, which is diverse and decentralised and with a democracy underpinned by diversity, transparency and accountability. A Resilient Environment is one in which biodiversity, soil health and other indicators of success are allowed to recover and which can then always regenerate itself faster than the impact of economic activity on it. These three elements create the conditions for much more self-reliance, from the community to the national level, and will put quality of life and security at the heart of public policy.

Why no bailouts?

The first two parts of this plan are devised entirely to work under devolution (which some very simple expansion of existing powers). Bailouts, subsidies or heavily-subsidised borrowing are all designed to support businesses in the short term with the assumption that the tax revenue that those businesses create in the long term will repay the cost of the borrowing government undertook to provide the subsidies. However this standard 'Keynesian' economic approach is not possible under devolution because much if not most of the tax revenue generated by the investment is captured by a government other than the one providing the bailout out. This means that even if Scotland could borrow to pay for the bailouts or subsidies it would be unable to repay the borrowing without redirecting expenditure from public services. This would not be acceptable, so the plan is developed around unlocking underdevelopment in the economy rather than subsidies for the existing economy. In the very short term it is also impossible to judge the real impact of this crisis or the timescale over which it will unfold. This makes it very difficult to know which businesses have long-term viability so throwing money at businesses just now would be very likely to result in a lot of wasted public money which will never be recovered. Even if equity stakes are taken, the value of equity in a failed business is zero which again means repayment of borrowing is impossible.

What do you mean by under-development?

Scotland deindustrialised in the 1980s and in the rush to develop a financial, retail and service sector economy (which produces a much higher proportion of low pay jobs) there was little or no thought put into diversifying the manufacturing base. This means that many manufacturing options which Scotland could have pursued (along with the potential for sustainable use of our natural resources) were simply ignored. This means that this large potential is still there but dormant and is capable of being unlocked rapidly. A major strand of the Resilient Scotland plan is to create speedy recovery and transition by quickly unlocking that potential. Another substantial problem for Scotland is that it has one of the most foreign-owned economies in the developed world and our weak domestic industry base means large amounts of Scotland's wealth are exported out of the economy by multinational corporations. Greatly increasing the proportion of the economy owned domestically means that, along with supply chain integration, Scotland can retain much larger proportions of its own wealth. In this way of approaching the economy the underdevelopment in Scotland is transformed from a failure to an enormous opportunity.

Is this all legal?

Scotland has been bound by a range of European Union rules on state aid, procurement and competition and these have been interpreted as inhibiting an approach of this sort. However there are a number of reasons this is not a problem. The first is simply that the interpretation of existing rules in the UK is very restrictive and almost every EU member already does the things proposed in this report because of a wide range of exemptions and workarounds, so even under the status quo most of it is possible. However no EU nation is currently following these rules anyway and they are likely to be adjusted for at least a period, making them more flexible again. And of course it is not clear what rules and for how long Scotland inside a Brexiting UK will have to follow. Nevertheless, everything in this report is designed to be compliant with the possibility of an independent Scotland applying to join the European Union. The full report contains a detailed compliance statement to explain how this can all be done. However some objections can simply be dismissed as what is believed to be legal in international law is simply misinformation. For example, Compulsory Purchase and Compulsory Sales Orders are entirely legal so long as 'fair compensation' is paid – and this does not mean market value.

Why don't you support a Universal Basic Income?

Common Weal does support a Basic Income, but this plan is designed to be implemented under devolution. A Universal Basic Income (as part of a wider system of economic and social security reform) is a very powerful tool (though not without risks) and Common Weal was one of the first organisations in Scotland to support and promote the concept. But there is no way to implement it without full fiscal and monetary powers and without full control over the tax and social security systems. Trying to fund one without these powers (even in a limited form) becomes prohibitively expensive. It would be possible for the UK Government to introduce one in Scotland alone if it did not wish to do so for England, Wales and Northern Ireland so it is suggested the Scottish Government inquire whether it would be willing to discuss this – but the report holds little confidence that this is at all likely.

So why are you not asking for more powers for the Scottish Parliament?

We do ask for new powers, but only two which are fairly minor (though have big impacts) and which can be achieved very quickly. This plan involves an enormous amount of work by the entire public sector and implementing the administration of new powers is time-consuming and would absorb a lot of effort (and in any case would take years before they were ready). This means that transferring powers like tax or social security are simply not realistic. In any case the devolved powers in Scotland have reached a point where, other than tweaks, any significant change in powers would require a move to something that looked much more like a federal position and there simply isn't the political will at Westminster to do this.

Are you proposing free holidays?

While this report is not based around subsidies it accepts that there are some areas of the economy which will be devastated without some financial support. However, that support should also be used to begin to change those sectors of the economy. It is far from clear when (if ever) international tourism will return to its previous levels and so making a shift towards domestic tourism is a good bet for shoring up the viability of the tourism industry in the long term. Filtering subsidy through citizens means both objectives can be met at once. This is why some of these proposals look like household subsidies – but that is the means, not the objective.

How does an industrial strategy work?

There are a wide range of policy tools which underpin an industrial strategy. These are discussed in more detail in Part Two of this report.

How does this relate to Resilience Economics?

Resilience Economics outlines the respected economic theories which underpin this approach and has been endorsed by a number of leading economists. It is, in effect, the theoretical foundation of this report (and is briefly summarised in it). Resilient Scotland is the action plan based on that theoretical model.

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