Budgets are a sideshow, so how can we grow faster?Stephen Boyle

16 April 2013

2

Starting point: the worst growth performance in 180 years

GDP from pre-recession output peakPeak = 100

90

95

100

105

110

0 4 8 12 16 20

Quarters since peak

Scotland - current cycle Average post-1955 UK cycle Great Depression UK - current cycle

Sources: Office for National Statistics, Bank of England

3

The UK government’s economic strategy

1. Fiscal austerity

2. Active monetary policy

3. Supply side reform

4

The constraint:debt is very high compared with recent decades, and still rising

Public sector net debt as a % of GDP

0

10

20

30

40

50

60

70

80

90

1980 1985 1990 1995 2000 2005 2010 2015Source: Datastream

5

Big steps and baby steps We are still in the foothills of fiscal austerity

Proportion of total reduction in deficit* occuring in each year

0%

20%

40%

60%

80%

100%

2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17* Cyclically-adjusted surplus on current budgetSources: OBR, Datastream

6

The UK can still borrow at historically low ratesWill that persist? Should the government borrow more?

Rate of interest the UK government pays to borrow for 10 years, %

0

1

2

3

4

5

6

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13Source: Bank of England

7

(How) can we achieve ‘escape velocity’?My approach

Scotland & UK are already rich & successful countries

In Scotland’s case, look for options within the existing constitutional settlement– No fiscal slack – ‘one-in, one-out’ approach to spending– Take the welfare system as given

Try to use the available evidence– Where are we strong or weak?– What works best?

Focus only on ‘growth’ and ignore the inevitable trade-offs– e.g. some environmental impacts

What makes economies grow?– More people (and other inputs)– Higher productivity

So, critical question: what will most effectively boost productivity?

Humility

8

Competition is the most effective means of delivering ‘good’ outcomesWhat can we do in to boost competition?

A more highly skilled workforce

Better management

More active owners

More innovation

Lower prices

9

Scotland’s workforce is one of our strengths, more so than the UKWe are well-qualified, perhaps over-qualified

Qualifications of working age people, 2011

0%

10%

20%

30%

40%

Level 4+ Level 3, inclapprenticeship

Level 2 Level 1 No qualifications

Scotland UKSource: NOMIS

10

Stylised evidence on the rate of return to ‘education’ at different ages

Source: James Heckman

11

Roads generate roughly twice the ‘return’ of local public transport & rail

Benefit to cost ratios of transport investments

0

2

4

6

8

10

12

14

Rail Local roads Local public transport

HighwaysSource: Eddington Review

12

Smaller projects generally offer better ‘returns’ than larger ones

13

Scotland’s overseas exports weathered the recession reasonably wellBut they have been becalmed in the recovery as world trade accelerated

Estimated exports in constant prices, 2011 = 100

70

80

90

100

110

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

UK total exports Scotland - total exports Scotland - excluding electronicsSource: Scottish Government, RBS Group Economics estimates

14

Pre-crisis, small firms were an engine of export growthPost-crisis, small firms have struggled – why?

Change in overseas exports by company size, £m

-1,000

-500

0

500

1,000

1,500

2,000

2,500

3,000

2002-08 2008-11

Large (250+) Medium (50-249) Small (<50)Source: Scottish Government

15

‘Planning’ makes office costs more expensive than they need beThat is a choice

‘Planning’ more than doubles office costs in Glasgow & Edinburgh

i.e. the price of occupying property is 200%+ more than the cost of construction

'Regulatory tax rate' on commercial propertyDifference between construction cost & price paid, 1999-2005

0

2

4

6

8

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Source: Paul Cheshire

16

‘Planning’ means fewer, more expensive houses

In England, ‘planning’ restrictions increase house prices and, hence, living costs

Relaxing planning constraints would reduce real house prices in England by 35% & boost the size of the housing stock by up to 17%

Source: Christian A. L. Hilber and Wouter Vermeulen

17

Unintended consequences of ‘planning’ on retailing, the price of shopping & High Streets

Again, in England, ‘planning’ restrictions reduced productivity in retailing, pushing up prices for shoppers

Planning policies that put town centres first mean prices are higher for shoppers and that chains can push out ‘local’ retailers

Productivity of retail outlets by year of opening

Source: Paul Cheshire, Christian A. L. Hilber and Ioannis Kaplanis

18

And less of …

19

And less of …

1990s

In 1993 Scotland Enterprise – the government’s economic development agency for lowland Scotland— launched the Business Birthrate Strategy. It set an ambitious target to close the gap in the business birth rate between Scotland and the rest of the UK by the year 2000.

2013

Scotland’s relatively smaller business base, low business start-up rate and lower levels of business expenditure on research and development, have been identified as key challenges facing the Scottish economy.

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