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Stephen Boyle, RBS Head of Group Economics, is a highly respected economist and uniquely placed to share the main issues and challenges facing Scotland in light of the 2013 Budget announcements. Stephen Boyle is Head of Group Economics at the Royal Bank of Scotland (RBS) Group and a director of RBS Pension Trustees Ltd, the Group's main pension scheme. Stephen first worked at RBS from 1996-2001 as Head of Business Economics. He returned to RBS in 2006, having established Futureskills Scotland. He has worked in universities and was director of an economic consulting business. Stephen is a Trustee of the David Hume Institute.
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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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on -
Wes
t End
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of L
ondo
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ankf
urt
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Cro
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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.
20
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