PSE026 1 Scotland's Economic Performance Aberdeen City Council and Aberdeenshire Council Introduction The Economy, Jobs and Fair Work Committee has issued a call for views on Scotland’s Economic Performance in terms of trends, challenges and future developments. It has been ten years since the Scottish Government introduced its National Performance Framework (NPF) which measures performance and progress towards the Scottish Government’s economic priorities. Through the NPF, the Scottish Parliament’s Economy, Jobs and Fair Work Committee will be examining Scotland’s economic performance since 2007, as well as exploring future challenges and opportunities for Scotland’s businesses and households. The Committee invites all interested individuals and organisations to submit written views on its inquiry. The remit of the inquiry is: “To examine Scotland’s economic performance since 2007 and understand the reasons for recent trends and divergences in performance between Scotland and the UK as a whole, other regions/nations in the UK, and other countries in the EU. The inquiry will also identify challenges and opportunities facing the Scottish economy over the next ten years and understand what action is required to make Scotland’s economy more inclusive, innovative and international”. This is a joint response from officers at both Aberdeen City Council and Aberdeenshire Council. GDP Growth and Productivity Question Response What have been the main drivers of growth in the Scottish economy since 2007? Growth in the Scottish economy has been driven by exports and a strong Services sector. Manufacturing and Construction industries have enjoyed less consistent growth since the 2008 economic downturn. Growth has been driven by Scotland’s unique and emerging sectors, including Food & Drink and Tourism (Scottish food and drink was the largest exporting sector in 2015 with £4.8 billion total exports). Scotland has abundant renewable energy sources and is world leading in emergent technologies such as tidal energy (The Scottish Government).
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Scotland's Economic Performance
Aberdeen City Council and Aberdeenshire Council Introduction The Economy, Jobs and Fair Work Committee has issued a call for views on Scotland’s Economic Performance in terms of trends, challenges and future developments. It has been ten years since the Scottish Government introduced its National Performance Framework (NPF) which measures performance and progress towards the Scottish Government’s economic priorities. Through the NPF, the Scottish Parliament’s Economy, Jobs and Fair Work Committee will be examining Scotland’s economic performance since 2007, as well as exploring future challenges and opportunities for Scotland’s businesses and households. The Committee invites all interested individuals and organisations to submit written views on its inquiry. The remit of the inquiry is: “To examine Scotland’s economic performance since 2007 and understand the reasons for recent trends and divergences in performance between Scotland and the UK as a whole, other regions/nations in the UK, and other countries in the EU. The inquiry will also identify challenges and opportunities facing the Scottish economy over the next ten years and understand what action is required to make Scotland’s economy more inclusive, innovative and international”. This is a joint response from officers at both Aberdeen City Council and Aberdeenshire Council. GDP Growth and Productivity
Question Response
What have been the main drivers of growth in the Scottish economy since 2007?
Growth in the Scottish economy has been driven by exports and a strong Services sector. Manufacturing and Construction industries have enjoyed less consistent growth since the 2008 economic downturn. Growth has been driven by Scotland’s unique and emerging sectors, including Food & Drink and Tourism (Scottish food and drink was the largest exporting sector in 2015 with £4.8 billion total exports). Scotland has abundant renewable energy sources and is world leading in emergent technologies such as tidal energy (The Scottish Government).
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Question Response
Scottish economic growth has been driven by exports and the North East of Scotland is one the largest exporting regions in Scotland. In 2015, total exports from the North East of Scotland amounted to £8,210 million, accounting for 21.3% of total Scottish exports. The North East of Scotland accounted for 20.6% of Manufacturing and other Non-Service industry exports from Scotland and 21.3% of Service industry exports from Scotland in 2015 (Scottish Export Statistics 2015). A key driver for the economy of the North East of Scotland’s economy will be the continued ability to access export markets and the medium-term sustainability of energy sectors.
In 2015, Gross Value Added per head from Aberdeen City Primary Industries was £281,993. Gross Value Added per head for Aberdeen City Professional, Scientific and Technical Activities industries in 2015 was £99,610 (Scottish Annual Business Statistics 2015). Gross Value Added per head for Food and Drink (excluding agriculture) industries in Aberdeen City was £110,498 and for Aberdeenshire was £71,358 (Scottish Growth Sector Statistics 2016).
The key driver of economic growth in the North East of Scotland has been the boom in Oil & Gas production and value, culminating in a peak in 2014. Whilst the rest of Scotland was suffering the effects of the 2008 recession, stagnant growth and austerity, the North East of Scotland enjoyed record employment, growth and turnover. The Oil & Gas sector allowed the North East of Scotland to experience high levels of economic growth, counter to the national economy. Due to the downturn within these industries, the opposite has occurred, with the North East of Scotland in relative economic decline whilst the national economy has experienced modest growth.
Scotland requires net inward migration to sustain growth in the labour market and the economy. By 2039, the working age population of Scotland will increase by 1.2%, whilst the pensionable age population will increase by 28.3% (National Records of Scotland. 2014-based population estimates). Industry within the North East of Scotland is highly reliant on EU nationals as a source of labour across a range of sectors including Food & Drink, Agriculture, Health, Professional & Scientific, Fishing, Oil & Gas, Accommodation and Tourism.
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Question Response
EU nationals are more likely to be in work in Scotland than the population as a whole (79% vs 73%) and make up a disproportionately large part of the North East population (11% of Aberdeen’s population compared with 3.4% of the Scottish population). EU nationals are also likely to be younger than the population of Scotland as a whole. (Spice paper: EU nationals living in Scotland). EU migrants have a positive effect on the Scottish economy: each EU migrant working in Scotland contributes an additional £34,400 to GDP per year. The total contribution by EU citizens working in Scotland is approximately £4.42 billion per year (Scottish Government).
How have Scotland’s key sectors performed over the past decade?
From a regional perspective, the North East of Scotland’s key sector has been Oil & Gas. This industry has performed extremely well, being the main source of economic insulation for the region whilst the rest of Scotland was experiencing economic difficulties. However, since the peak in 2014, the downturn in this industry has caused regional economic decline, in output and employment. This has run counter to the rest of Scotland. The downturn in oil and gas has been felt across the economy in the North East with falling demand across the supply chain and the retail and office sectors.
There are substantial Wind Power infrastructure and resources in the region. Renewable energy is a growth sector which the North East of Scotland is ideally placed to exploit, with the infrastructure, assets and workforce to support is continued expansion. Major Investments include the Hywind offshore windfarm at Peterhead, the £1.7bn Kincardine Offshore Wind with consented 50MW floating wind 8 miles off Stonehaven, Aberdeenshire has 100MW non domestic biomass installations and 25MW solar deployment.
How does Scotland growth rate compares with the UK as a whole, other regions/nations of the UK, and other countries in the EU?
Scottish economic growth has been modest in recent years. Scottish GDP growth throughout 2015 and 2016 has been modest and has been negative in two quarters of the last eight (Fraser of Allander Institute). Scotland remains a strongly performing economy alongside EU counterparts, although there are significant challenges, such as labour market participation, attracting skilled labour, foreign investment and demographic trends. Employment, Household Income and Gross Value Added in Scotland remain substantially higher than the majority of EU 28 counterparts (Eurostat).
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Question Response
The economic output of the North East of Scotland is higher than the Scottish national average proportional to the population share. The region accounts for 14.2% of gross value added in Scotland in 2015 and 21.0% of international exports, with 9.1% of the total Scottish population. Private Sector operations continue to be more substantial than in other regions. Worker output is also very high, in large part due to Energy related industry.
The North East of Scotland is predominantly based around service sectors. Service sectors in the region have been overwhelmingly based around Oil & Gas activity and service sector growth in the region has been unlike other regions. The region has large
Employment by Industry - Aberdeen City & Shire and Scotland (2016)
Aberdeen City & Aberdeenshire Scotland
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Question Response
resources of agriculture and fishing industry. In 2016, there were 9,870 people in employment within Agricultural and Fishing industries in Aberdeenshire, with more than 3,000 Enterprises (ONS).
In 2016, 10.9% of Aberdeen City and Aberdeenshire employment was within Mining, Quarrying and Utilities, compared to 2.6% of Scottish employment. 12.3% of Aberdeen City and Aberdeenshire employment was within Professional, Technical and Scientific Activities industries in 2016, compared to 6.9% of Scottish employment. 8.4% of Aberdeen City and Aberdeenshire employment was within Manufacturing industries in 2015, compared to 7.0% of Scottish employment. (ONS. BRES).
Where will we see future growth in our economy – exports, sectors, regions and innovations?
Scotland lags behind other comparable economies in terms of productivity and levels of equality. There is no clear definitive reason identified as to why this has been the case and weak productivity is also pervasive within the broader UK economy. Inequality and poverty has proved to be a long standing issue within Scotland’s economy. Addressing poor productivity is an issue for future economic growth.
However, growth in the Scottish economy can be facilitated by growth in the North East. The North East of Scotland has a disproportionately high share of Scottish exports and there is evidence that suggests an area’s productivity is largely determined by its Export Base (Centre for Cities 2017 The-role-of-place-in-the-UKs-productivity-puzzle).
The North East of Scotland’s key sectors of tourism, life sciences, oil and gas and food and drink and primary industries (Regional Economic Strategy) are highly integrated within Europe. Labour market participation is also substantially higher within the region compared to the resident population prior to the recent slump.
The key regional diversification sectors are all adversely affected by disruption to trade and access to markets It is highly likely that the North East of Scotland will be the UK region hardest hit by the negative impacts of Brexit (Fraser of Allander Institute).
For the North East of Scotland, attracting investment that is not predicated on the past success of the Oil & Gas industry remains a challenge. In the past, the largest proportion of foreign direct investment projects in the North East of Scotland have been related to the Oil & Gas industry and now the region is challenged with and developing new markets and sectors as well as maximising economic recovery from existing oil and gas reserves and diversification within the sector to both decommissioning and
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Question Response
renewables. The Oil and Gas Technology Centre in the City Region Deal has a key role in enabling this.
What is Scotland’s industrial composition and what are the barriers to diversification and growth?
As a proportion of total employment, Scotland has more Agricultural, Forestry and fishing Industries than other UK regions (Scotland: 2.9%; UK: 1.6%). Employment within Mining, Quarrying and Utilities industries is proportionally highest in Scotland out of all UK regions (Scotland: 2.6%; UK: 1.2%). Scotland has proportionally less employment within manufacturing industries than other UK regions (Scotland: 7.0%; UK: 7.9%). Scotland also has proportionally less employment within Professional, Scientific and Technical Activities industries than the UK (Scotland: 6.9%; UK: 8.7%) (ONS: BRES).
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Question Response
The North East of Scotland has substantially more employment concentrated within Mining, Quarrying and Utilities Industries than the Scottish national average (Aberdeen City 13.4% ; Scotland 2.6% from the chart above). There are far more people employed within Professional, Scientific and technical Activities industries in the North East than in Scotland (Aberdeen City 12.6%; Scotland: 6.9%). As a result of the economic downturn within the Oil & Gas industry, the North East of Scotland has lost substantial employment within these industries. These industries are the predominant reason for the region’s economic success and higher than average value. There remains global
Arts, entertainment, recreation & other (R,S,T and U)
Industry Sector Composition - Scotland and Other UK Regions (2016)
East East Midlands London North East North West Scotland South East South West Wales West Midlands Yorkshire and The Humber
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Question Response
expertise within these industries in the region, such as project management and subsea activities. There also exists substantial opportunities for the decommissioning of Oil & Gas infrastructure. The North Sea opportunity is estimated at £40 billion. An estimated 60% of cost of decommissioning is well plugging and abandonment, with the companies and supply chain in the North East of Scotland heavily involved with this as work is carried out subsea.
In 2015, there were 25,000 EU nationals living in Aberdeen City, accounting for 11% of the population. Aberdeen City had the highest proportional EU national population of any Scottish local authority in 2015 (SPICe. EU nationals living in Scotland 2015).
The North East of Scotland has a proportionately higher number of EU nationals than its population share and many industries and reliant upon their contribution (Energy, Fishing, Agriculture, Food and Drink, Accommodation). 11.3% of total employment within Scottish Food and Drinks industries in undertaken by EU nationals and 10.8% of employment within Scottish tourism industries is undertaken by EU nationals (The Scottish Government. EU National in Scotland 2015). 12.7% of EU nationals living in Scotland live in Aberdeen City, with the employment rate for EU nationals in Aberdeen City at 87.6%. The employment rate for EU nationals in Aberdeenshire was 94.5% in 2015, demonstrating the contribution of these groups within the reginal economy (The Scottish Government. EU Nationals Living in Scotland 2015). EU nationals in the region contribute highly to the region and have far higher ratios of economic participation than the total population. The region is highly dependent on migrant labour and loss of potential labour being attracted to the region would have damaging consequences for industry.
The contribution of EU nationals is crucial to some of the sectors in the North East of Scotland. They are dominant in the hospitality, health and social work, agriculture (especially soft fruit) and food processing sectors in the North East. There are also significant numbers in the distribution and other service sectors. The food processing sector, which includes meat and fish processing, is a vital factor in the North East economy as it provides a market for primary produce and is therefore of great importance.
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What role has Government support for innovation played in growing Scotland’s economy and boosting productivity?
Productivity in Scotland has caught up with the UK in recent years, both in terms of output per hour and output per job (Fraser of Allander Institute). Productivity in the North East of Scotland is higher than almost all regions in the UK and this is largely a result of the Oil & Gas industry. In 2015, Aberdeen City and Aberdeenshire had the highest levels of productivity in all of Scotland, with £36.66 Gross Value Added generated per hour worked (Scotland: £31.00). Gross value added per job in Aberdeen City and Aberdeenshire was £60,982, compared to £48,674 for Scotland and £50,830 for the UK (ONS: Regional Productivity). Utilising the skills, business innovation and productivity that has contributed to the success of the Oil & Gas industry remains a challenge for the region.
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There are challenges for central and local government in facilitating growth and innovation within the economy, including funding infrastructure, incentivising investment, lack of sufficient housing stock, attracting and retaining skilled labour, creating renewable energy infrastructure including funding mechanisms for emerging sectors.
Aberdeen City and Aberdeenshire Councils is continuing to look at additional levers to deliver economic growth in the North East. The North East of Scotland has explored innovative ways of funding for economic growth including developing the City Region Deal. The objectives of the Aberdeen City Region Deal are to:
Invest in the infrastructure necessary to facilitate sustainable economic growth;
Work collaboratively to create new opportunities for growth, and develop new ways of working and innovating across sectors;
Consolidate our status as a global energy hub, and grow trade and investment flows from and to the region; and
By anchoring industry activity in the North East of Scotland, extend oil and gas tax and other revenue contributions.
Inequality and Labour Market Issues
Question Response
What are the main drivers of income and wealth inequality in Scotland?
Low wages and rising cost of living have put large pressures on low income households and earners. Wage growth has not kept in line with inflation, which has a more detrimental effect on those earning low wages than for those earning more. The same is true for those in receipt of out of work benefits, which have also not risen with Inflation. Despite low levels of unemployment wage growth has not picked up in recent years which could reflect the increase in lower productivity employment, the increase in the use of flexible “zero hour contracts” and the decline of unionised labour in terms of wage bargaining.
Income inequality in Scotland remains substantial, yet wealth inequality in Scotland is enormous. It is increasingly difficult for those on lower incomes to afford assets (i.e. property), exacerbating this gap. Insecure and low-paid employment is a key driver of this gap. Insufficient labour market opportunities also drive this gap, which has a
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large geographical dimension.
The North East of Scotland has high levels of income inequality driven in part by the large incomes available in the oil and gas sector. Housing and the cost of living has been historically high in the region, boosted by the prosperity of the energy sector. There are large numbers of people in the region living in low income households, in insecure employment and living in poverty. In 2015 there were 32,810 people in Aberdeen City and Aberdeenshire who were income deprived and 18,205 working age people who were employment deprived (Scottish Index of Multiple Deprivation 2016). These figures predate the downturn in the Oil & Gas sector and are now substantially higher. In 2015, 18.2% of children in Aberdeen City were living in poverty, with 29.4% of children living in the Northfield area living in Poverty (The Scottish Government). Those in receipt of claimant count unemployment benefits reached an historic high in Aberdeen City and Aberdeenshire with 6,565 claimants in March 2017 (ONS Claimant Count).
The Regional Economic Strategy provides a 20 year plan for the North East of Scotland to secure investment into the North East economy. The vision is to capitalise on the global reputation in oil and gas to maximise economic recovery and stimulate exploration activity from the UKCS, underpinned by a world-class innovation and technology development and improvements to our infrastructure. A key longer term objective of the strategy is to deliver a more balanced and resilient economy and achieve inclusive economic growth that will benefit all.
How does income and wealth inequality in Scotland compare to other countries/regions and what are the policy responses to income and wealth inequality in Scotland and abroad?
Scotland performs poorly when it comes to income and wealth inequality. The richest 1% of the Scottish population have combined wealth of more than the bottom 50% of the population (The Scottish Government. Poverty and Income Inequality in Scotland). In the more affluent areas of Scotland, including Aberdeen City and Aberdeenshire, the difference between the poorest and richest is even more pronounced. In 2016, Aberdeenshire had the 3rd highest median household income in Scotland, with Aberdeen City having the 6th highest. 5.6% of Aberdeen City Households have median household incomes in excess of £100,000, with the figure for Aberdeenshire at 7.2%. Despite this, 22.0% of Aberdeen City households in 2016 had median household incomes of £15,000 or less, with 17.4% of Aberdeenshire households having the equivalent income (CACI Paycheck). The North East of Scotland has a higher proportion of households with at the highest end of the income
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distribution, with a higher level of income and wealth inequality also.
What have the trends in debt, wages and household income been over the past decade?
UK household debt is at historically high levels which could increase with stagnant real wages and rising inflation.
The North East of Scotland has the highest disposable household income in Scotland, a consequence of the importance of the highly paid Oil & Gas Industry. The region has suffered the economic consequences of the Oil & Gas downturn in the broader economy. This effect of induced economic decline and unemployment means that lower-income households in the region are likely to get poorer. The region has witnessed exponential increases in food bank. Unemployment has increased within deprived areas at a far greater extent that less deprived areas, suggesting that the knock-on effect from the oil & gas downturn is being severely negative outside of those directly employed within these industries (ONS. Claimant Count). The region also has one the largest income and wealth gaps in all of Scotland. The effects of the regional downturn are being most severely felt within the wider economy. As a result, household debt in the region is likely to rise.
What are the reasons for regional differences in labour market participation?
In Scotland, the majority of young people in the labour market reside in cities, as these are where educational and employment opportunities tend to be.
The majority of value generated and employment is within Scotland’s three largest city regions. This has led to the uneven distribution of economic growth, with many regions in Scotland lagging behind. In the North East there has been particularly high growth in the oil and gas sector which has increased demands in the service and housing areas of the economy in the North East. This has had the effect of raising house prices in the North East and has meant that there has been difficulty in attracting people to work in the North East in industries with relatively lower incomes such as care workers and other key workers.
How has the labour market in Scotland changed over the past decade?
Despite record high employment and record low unemployment in Scotland, persistent structural problems remain within the Scottish labour market. An ageing population and the ability to attract employment from migration remain a challenge in the mid-term. Migration of skilled labour to facilitate and sustain growth is vital for Scotland’s economy and any barriers to this would be highly detrimental. Persistent economic inactivity, which has a highly regional component, still remains a large problem in many areas of Scotland.
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The concentration of economic growth to specific population centres also presents labour market participation challenges and uneven economic growth. Creating highly skilled and well paid employment opportunities for the resident population has also proved greatly challenging.
The rise in insecure employment, self-employment, insecure working patterns and part-time employment is also challenging to economic prosperity and the prospects of those entering the labour market.
What are the different models of business ownership in Scotland and what is their importance to Scotland’s economy?
