Ending stagnation: How to boost prosperity across Scotland

A toxic combination of 15 years of low growth, and four decades of high inequality, has left Britain poorer and falling behind its peers. Productivity growth is weak and public investment is low, while wages today are no higher than they were before the financial crisis. Britain needs a new economic strategy to lift itself out of stagnation.

Scotland is in many ways a microcosm of this challenge. It has become a hub for creative industries, is home to several world-class universities and a thriving community of businesses – strengths that need to be harness and leveraged. But it also has high levels of deprivation, with homelessness reaching a record high and nearly half a million people living in very deep poverty last year. Scotland won’t be truly thriving unless it finds ways to ensure that all its inhabitants benefit from growth and investment. This is the central challenge facing policy makers both in Holyrood and Westminster.

What should a new national economic strategy for Scotland include? What would the pursuit of stronger economic growth mean for local, national and UK-wide policy makers? How will economic change affect the jobs we do, the places we live and the businesses we work for? And what are the prospects for cities like Glasgow, and nations like Scotland, in rising to these challenges?

1. How to boost prosperity across Scotland Mairi Spowage , Director of the Fraser of Allander Institute Patricia Findlay, Co-Chair of Scotland's Fair Work Convention Anton Muscatelli , Principal of the University of Glasgow Charlie McCurdy, Economist at the Resolution Foundation Chair: Gavin Kelly, Chair of the Resolution Foundation Ending stagnation

2. @resfoundation Ending stagnation How to boost prosperity across Scotland

3. The problem

4. 4 Rolling decadal growth rates of GDP per capita: GB/UK Notes: Rolling average of each variable in the three years centred on the date shown, compared to the three years centred on the date 10 years previous. For example, 2020 shows growth between 2009-2011 and 2019-2021. UK data for GDP and incomes, GB data for wages. Source: Analysis of Bank of England, Millennium of Macroeconomic Data; OBR, Economic and Fiscal Outlook, March 2022; ONS, RHDI; ONS, UK resident population. We’re over a decade into stagnation

5. 5 Rolling decadal growth rates of GDP per capita … and real wages: GB/UK Not inevitable : stagnation to this degree not happening everywhere – UK has fallen further behind US, France and Germany Notes: Rolling average of each variable in the three years centred on the date shown, compared to the three years centred on the date 10 years previous. For example, 2020 shows growth between 2009-2011 and 2019-2021. UK data for GDP and incomes, GB data for wages. Source: Analysis of Bank of England, Millennium of Macroeconomic Data; OBR, Economic and Fiscal Outlook, March 2022; ONS, RHDI; ONS, UK resident population. We’re over a decade into stagnation

6. 6 Real average weekly earnings (regular pay), actual and pre-recession trend: Scotland Notes: Adjusted to 2023 prices using CPI. Pay is regular pay i.e. excluding bonuses and arrears. Pre-recession trends is UK-wide. Source: RF analysis of ONS, Annual Survey of Hours and Earnings. In the olden days, wages did actually rise

7. 7 Notes: Gini coefficient calculated using income after housing costs. UK from 2003-04, Great Britain from 1961 to 2002-03. Source: Analysis of IFS, Living Standards, Poverty and Inequality 2020; DWP, Households Below Average Incomes, 2021. Today’s low growth combines with long-lasting high inequality Gini coefficient for equivalised disposable household income (after housing costs): UK

8. 8 Notes: Income is equivalised and PPP adjusted. Source: OECD, Income Inequality Database. This leaves the UK both poorer and more unequal than many other ‘similar’ countries Gini coefficient and average disposable income per capita: OECD countries, 2019

9. 9 Notes: Income is equivalised and PPP adjusted. Source: OECD, Income Inequality Database. This leaves the UK both poorer and more unequal than many other ‘similar’ countries Gini coefficient and average disposable income per capita: OECD countries, 2019

10. 10 Incomes in the UK compared to Germany, Netherlands and France, at bottom and top of income distribution: 2018 Notes: Difference between UK and selected countries in p10 and p90 household incomes using OECD PPPs for household final expenditure. Source: OECD Income Distribution Database; Eurostat, EU-SILC Distribution of income by quantiles; DWP, Households Below Average Income. Stagnation + inequality = UK is a bad place to be poor

11. 11 Proportion of population responding that their local area has ‘generally declined’ in recent years: GB, 2022 Note: Proportion shown is a simple average across local authorities in a region. Results were modelled by YouGov from a sample of 115,788 adults, with polling taking place between 9 August – 21 September 2022. Source: YouGov, MRP: in no Levelling Up area do residents tend to think the local areas has improved in recent years, January 2023. … leaving many feeling we’ve been heading in the wrong direction.

12. Towards an economic strategy

13. We need to: Get serious about growth Be as hard-headed about reducing inequality The short version 13

14. Serious about growth

15. 15 Exports of services (current USD): selected countries: 2019 Source: International Monetary Fund, Balance of Payments Statistics Yearbook and data files. Reason to be optimistic: UK is a services superpower

16. 16 Gross value added (GVA) per worker by country and area: 2018 Notes: PPP adjusted. Spatial units are a combination of OECD metro regions and NUTS3 for non-metro regions. Bubbles are proportional to the number of workers in each region. Gross value added (GVA) is the value of a unit’s outputs less the value of inputs used in the production process to produce the outputs. Source: Analysis of OECD, Regional Economy Database. More places like Edinburgh = boosting large cities outside London

17. Getting serious about growth = being an investment nation Notes: Swathe includes Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Iceland, Ireland, Israel, Italy, Japan, Korea, Latvia, Lithuania, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland and United States. Source: Analysis of OECD, Aggregate National Accounts. 17 Gross fixed capital formation as a proportion of GDP: selected Advanced Economies Low UK investment true of both government and business Business : Reduce costs – esp. planning Reform ownership & governance Government : Raise to 3% GDP End volatile policy Raise investment

18. 18 Capital investment costs and operating cost savings in the CCC balanced net zero pathway This will require significant investment (£50bn+) a year by 2030, but by 2040 the savings will outweigh the costs Need to make everyday improvements to efficiency of our cars and homes Notes: Values above the x-axis refer to additional annual capital investment. Values below the x-axis refer to savings that result from reduced operating costs Source: Analysis of CCC data @resfoundation Being an investment nation = getting serious about net zero

19. Serious about inequality

20. 20 Real value of unemployment benefits as a proportion of average weekly earnings: UK Unemployment benefits have become less generous compared to average earnings Benefits should be uprated in line with wages, not prices Unemployment benefits linked to pay after job loss Notes: Unemployment benefits refers to single person 25+ Jobseekers Allowance rate and Universal Credit standard allowance. 12-month rolling average. Source: Analysis of DWP, Abstract of Benefit Statistics; OBR, Economic and Fiscal Outlook November 2023. @ resfoundation We need a stronger safety net

21. 21 Proportion of children living in relative poverty, after housing costs: 1961-2030 Notes: RF projections based on The Living Standards Outlook – Summer 2023 Update, September 2023. This does not include the impact of Best Start Grants nor the future extension of universal free school meals to P6 and P7 pupils. Source: RF projections and analysis of DWP, Households Below Average Income; Scottish Government, Tackling child poverty delivery plan - annual progress report, June 2023. @ resfoundation Scotland has lower levels of child poverty than the UK - but isn’t on course to its meet key poverty targets

22. 22 Annualised growth in real hourly pay across the distribution in selected periods: GB NOTES: Pay adjusted for CPI inflation. SOURCE: Analysis of ONS, Annual Survey of Hours and Earnings and New Earnings Survey Panel Dataset.. @resfoundation We’ve done some things well - hello minimum wage

23. 23 Proportion of employees who are “mostly” or “completely” satisfied with their present job overall, employees by monthly earnings quartile: GB/UK, 1991-1992 to 2017-2019 Notes: Quartiles are constructed using monthly gross earnings. Similar results hold when using hourly earnings albeit the decline for the lowest quartile is smaller in magnitude. Combines responses from 18 waves of the British Household Panel Survey prior to 2009 with responses from ten waves of the UK Household Longitudinal Study from 2009 onwards. Results are averaged over two years/waves. Survey covers Great Britain from 1991-2000, and the UK from 2001 onwards. Source: Analysis of British Household Panel Survey; UK Household Longitudinal Study (Understanding Society). @resfoundation But, we need a ‘good work’ agenda beyond the minimum wage Right to a contract reflecting actual hours Require employers to give two weeks’ advance notice of shifts Increase sick pay to 65% of usual earnings and extend to lowest earners Good Work Agreements in some sectors

24. Eyes on the prize

25. 25 Notes: Income is equivalised and PPP adjusted. Source: OECD, Income Inequality Database. The UK can plausibly both become richer and more equal Gini coefficient and average disposable income per capita: OECD countries, 2019

26. 26 Notes: Income is equivalised and PPP adjusted. Source: OECD, Income Inequality Database. The UK can plausibly both become richer and more equal Gini coefficient and average disposable income per capita: OECD countries, 2019 Effect on median household income in UK of moving UK to the average inequality and income of Australia, Canada, France, Germany and the Netherlands: £8,300

27. How to boost prosperity across Scotland Mairi Spowage , Director of the Fraser of Allander Institute Patricia Findlay, Co-Chair of Scotland's Fair Work Convention Anton Muscatelli , Principal of the University of Glasgow Charlie McCurdy, Economist at the Resolution Foundation Chair: Gavin Kelly, Chair of the Resolution Foundation Ending stagnation