Economic Policy Challenges for the Next Scottish Government – post-Covid, post-Brexit

Graeme Roy | 8 April 2021

© 2018 SCER

Election campaigns typically provide an opportunity to look back over the past five years and to reflect on the progress made over the parliamentary term just ended. But it’s next to impossible to do that this time around given the huge – and unexpected – shocks that have hit the Scottish economy since 2016.

First, it was the surprise victory for Vote Leave in June 2016, and the hit to economic confidence and investment that then followed the endless dithering and political in-fighting as the UK lumbered precariously close toward ‘no deal’.

Second, and just as clarity on the shape of the UK’s exit from the EU was emerging, COVID-19 ushered in a widespread shutdown and the greatest fall in economic activity in over 300 years.

The result is that whoever forms the next government faces a huge task of rebuilding our economy. So, what will be the big economic issues facing that next government?

The immediate task will be how best to support the phased re-opening of our economy.

In large part due to the unprecedented support from UK-wide initiatives such as the furlough scheme, we have not yet seen the sharp rise in unemployment we would expect from an economic crisis of this scale. Sadly, however, we are in somewhat of a false position just now as it will only be when all the government support mechanisms are lifted that the full effects of the crisis will be revealed.

The journey back to recovery will take time too. Whilst technical measures such as Gross Domestic Product (GDP) might recover to pre-pandemic levels relatively quickly (and possibly as soon as early 2022), for many it will feel that we’re still in a recession for some time yet. An overhang of debt will cloud the outlook for years to come.

A key challenge for the new economy team in government will be developing a strategy for the post-pandemic economy. Money is likely to be tight. But enterprise and economic development are areas where we spend significantly more than elsewhere in the UK (to the tune of around £100 a year per person).

Relations between business and government have become strained and will need to be reset.

Some of the priority areas for policy are obvious, such as creating jobs and training opportunities for the thousands of young people who will find it a struggle to get work over the next few years. Expect to hear a lot too about efforts to capitalise on investment opportunities tied to net zero.

But in other areas, the choices are much more complex. Understanding the legacy effects of this crisis won’t be easy. It will require patience and a willingness to respond flexibly as our understanding of the effects of COVID-19 on our economy improves.

This crisis has for example, thrown up all manner of spatial challenges, from the hit to rural areas from the collapse in tourism to questions over the future of city centres in a world where many of us will find ourselves working from home a great deal more. Where should investment be targeted?

At the same time, many of the economic sectors that are likely to require ongoing support, such as hospitality, are not those traditionally at the front of the queue for government grants or investment. But how might government balance the need to support those parts of our economy most in need vis-à-vis those areas that are the most innovative, productive and growth orientated?

Some might hope that as we look to rebuild from Covid-19 there is a golden opportunity for a root-and-branch review of economic policy in Scotland. The rhetoric of the last economic strategy around inclusive growth is gradually being replaced by a new economic wellbeing agenda. But we’re yet to see much detail on what practical changes might this shift force through, and what might be the trade-offs and consequences?

Of course, the task of rebuilding our economy will be made all the harder by the frictions introduced by Brexit. We have all seen the challenges that new trade barriers have imposed for many in the food & drink industry since the turn of the year.

But the worrying costs of Brexit were never just the immediate dislocation of activity. Instead, of greater concern were the long-term costs stemming from the gradual erosion of the economic ties with our largest international market.

Covid-19 has led to a sharp fall in international trade and investment, not just in Europe, but across the globe. Many supply chains have become more local and international business travel has been frozen. How quickly this will bounce back is hugely uncertain, but it is sensible to plan for it to take time. Unfortunately, with Brexit, Scotland will be responding to these global trends however, against a backdrop of higher costs, more complex logistics and more difficult relationships with many of our trading partners than before.

To help, the next government can draw upon two commendable policy documents published by the Scottish Government in the last couple of years – Scotland: a trading nation and Shaping Scotland’s economy: inward investment plan – which set out practical steps to improving the internationalisation of Scotland’s business base. The ideas are sensible, but as always, their success will be in the execution and staying the course.

Elections often revolve around a small set of topical and emotive issues. In this campaign, much of the attention will be given to debating the government’s track record fighting Covid-19, the routemap to easing the lockdown, and recovering lost ground in health and education. And of course, making sure we know each party’s position on the Constitution – in case we’d managed to forget!

But the next parliament will have to tackle a much, much, wider range of issues. Looming over it all will be the performance of the economy. It’s perhaps naïve to expect a detailed policy debate about how we grow our economy sustainably and more fairly in the middle of an election campaign, but it will be a task that will be at the top of the ‘to do list’ for whoever wins on May 6th.

 

Graeme Roy | Twitter

University of Glasgow

Graeme Roy is a Professor in the Adam Smith Business School & Dean of External Engagement in the College of Social Sciences at the University of Glasgow. He was formerly Director of the Fraser of Allander Institute (2016 – 2021) and prior to that was a Senior Economic Adviser in the Scottish Government