Scottish Economy Debate

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Department: HM Treasury
Wednesday 27th June 2018

(6 years, 4 months ago)

Westminster Hall
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Stephen Kerr Portrait Stephen Kerr (Stirling) (Con)
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It is a pleasure to serve under your chairmanship, Mrs Main. I congratulate the hon. Member for Rutherglen and Hamilton West (Ged Killen) on securing this important debate on the future of Scotland’s economy.

Scotland’s GDP continues to languish in the doldrums and is not forecast to grow by more than 1% per year until at least 2023. A critical indicator of an economy’s future success is the overall level of investment. In Scotland, although foreign investment is high, overall investment is low. That is not a healthy picture, and it is not a solely Scottish problem, but one that affects the entire UK economy. It is one of the key drivers of low productivity.

According to World Bank figures, investment in the UK from public and private sources sits at 17% of our GDP, which put us 118th in the world. The United States invests 20% of its economy, and Japan invests 24%. The arguments on the need to improve our levels of investment are well rehearsed, but I would like to focus on the need for a fully functioning, effectively organised UK national investment bank to shape the future of Scotland’s economy, and to invest in enterprise—especially, of course, in Scotland. Let me strike a chord of bipartisanship here. I know the Scottish National party has a plan for a Scottish investment bank, and it is a worthy concept, but I want to advance the case for a UK national investment bank.

Jim McColl is one of Scotland’s most successful business people and we should listen to him. He recently commissioned a report from University College London on the case for a UK national investment bank, and I recommend it as a thoroughly sound read. I would be very happy to supply every Member of the House with a digital copy of the report, from which I wish to make three quick points. First,

“By making strategic investments and nurturing new industrial landscapes, a modern industrial strategy focused on solving important societal challenges can help to rebalance the economy and reinvigorate the industrial base.”

Secondly,

“This requires not just any type of finance but patient, long-term, committed finance. This can take different forms, but in many countries, patient strategic finance is increasingly coming from state investment banks...By developing new financial tools and working closely with public and private stakeholders, state investment banks can—if structured effectively—play a leading role driving growth and innovation.”

Thirdly,

“The European Investment Bank...has long been a key source of finance for infrastructure projects in the UK, financing £7 billion of projects in 2016.”

As we leave the EU, we clearly need to consider options to replace the European Investment Bank.

A national investment bank of the type found in many European countries would ensure the availability of quality patient capital. Entrepreneurs have to have access to patient capital, because they need immediate investment for longer-term returns. If businesses do not have access to that quality of capital in our country, they move to where they can get it. If they do not physically move, the ideas that need to be nurtured by patient capital move, and we see the continuation of the old cycle. Britain, and Scotland in particular, is a magnificent nursery of imagination and creativity. New products and concepts start off on their journey of commercialisation on these shores, but end up being fully deployed and exploited somewhere else. That cycle must be broken for good, and the availability of patient capital is crucial.

Paul Sweeney Portrait Mr Paul Sweeney (Glasgow North East) (Lab/Co-op)
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The hon. Gentleman mentioned Jim McColl; I met him recently to discuss the future of commercial shipbuilding in Scotland. The example he cites is exactly the point that the hon. Gentleman mentioned. In Germany, they have access to patient finance and can finance the capital cost of a ship—up to £1 billion apiece—whereas in Scotland there is simply no facility for that. Does he not agree that a Scottish investment bank, although a laudable proposal, would not be on anywhere near the scale needed to achieve the massive industrial growth that we need?

Stephen Kerr Portrait Stephen Kerr
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I absolutely agree with the hon. Gentleman. That is why I am advocating, for the future of Scotland’s economy, a UK investment bank. I have had many dealings with Jim McColl, and I agree with the direction of his argument.

Patient capital instils long-term support, builds confidence in the whole commercialisation process, from ideation to launch, and fosters the entrepreneurial spirit of our brightest and best. The return on patient capital invested is a measure of financial success, but when it comes to measuring social good, those things are exponentially better.

I prepared a much longer speech on this subject. I know the Minister might refer me to the British Business Bank, but to me it is not really operating to its full potential as an actual real bank. The resource available is too low. It is £200 million a year from the taxpayer for the whole UK economy; that will do little to address the investment shortfall in our economy. Essentially the British Business Bank needs to be reformed to become a real bank with the ability to issue bonds and raise funds.

Finally, in the interests of time—I might have already gone over my time limit, for which I apologise, Mrs Main—I want to ask the Minister a couple of simple questions as we consider the future of Scotland’s economy. Do the Government accept that British businesses and entrepreneurs need an additional source of good quality patient capital—capital that is not currently available in any quantity? What is our Government’s considered view on the proposition that the British Business Bank be converted into a fully functioning national investment bank, on the same basis as the national investment banks in other countries? To agree further with the hon. Member for Glasgow North East (Mr Sweeney), Germany is an example: the KfW is worthy of close examination by the Government, especially as we leave the European Union and have to consider how we will support British businesses—and Scottish businesses in particular—to compete on the global scene.

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Paul Sweeney Portrait Mr Paul Sweeney (Glasgow North East) (Lab/Co-op)
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It is a pleasure to serve under your chairmanship for the first time, Mrs Main. I start by thanking my good friend and comrade, my hon. Friend the Member for Rutherglen and Hamilton West (Ged Killen), for securing this debate and for making a speech that cut to the very heart of the problems that will face the Scottish economy in the decades to come.

With the impending threat of Brexit and the threat of a second Scottish independence referendum always on the horizon, it strikes me that once again people in Scotland are caught in a vice between two Governments who are absolutely intent on causing them economic harm in pursuit of their own nationalist and constitutionally driven agendas. We have seen that writ large today. It is not about talking Scotland down. In fact, speeches today have reflected the passion that Members have for standing up for their constituents and their economic interests. My hon. Friend the Member for Midlothian (Danielle Rowley) talked about the real issue of the massive job cuts her constituents face. Calling that “talking Scotland down” does a real disservice to Members in this Chamber.

People in Scotland have been let down on two counts over the past 10 years. First, a UK Government have taken the political choice—I emphasise that it is a choice—to implement austerity. Secondly, a Scottish Government, rather than use the powers they have to alleviate and mitigate those austerity measures, have consistently chosen to use the Scottish Parliament as a conveyor belt simply to pass that austerity on and, indeed, amplify it at the local government level. That is not what the Scottish Parliament was meant to be and not what those of us on these Benches who fought long and hard for its creation envisaged.

We envisaged a Parliament in Edinburgh that would be a bulwark against Tory austerity, would stand up and be counted and would chose a different path. Trends show that the Scottish economy is lagging behind that of the rest of the UK in terms of growth, productivity and employment. In 2017, growth stood at just 0.8%, while the Scottish Fiscal Commission predicts that growth will remain at less than 1% until 2024—something that the Fraser of Allander Institute has labelled as “unprecedented in a generation”. It is the slowest period of long-term growth in the Scottish economy in over 60 years.

I would of course like to caveat that with the fact that statistics released this morning show that growth has increased by 0.2% during the first quarter of 2018, which is slightly higher than in the UK as a whole. That news is of course welcome, but I should like to think that everyone in the room today would like to see improvement and would agree that the long-term growth trend remains insufficient. Productivity was mentioned by several Members, and it has dropped by 2.2% in the past year alone. It is a fundamental economic principle that to generate economic growth, a country must increase productivity. To increase productivity, two very important factors must be addressed: investment and an interventionist industrial strategy.

Scotland’s productivity ranks in the third quartile of OECD countries, and the rate of productivity growth in Scotland lags behind that of many of our competitors. To catch up, Scotland must expedite a significant increase in its rate of productivity growth. Achieving the required growth would be truly transformational for the Scottish economy. Increasing Scotland’s productivity to the level of the top quartile of OECD countries would grow GDP by almost £45 billion, which is an increase of 30%. Annual average wages would be more £6,500 higher, which is an increase of 25%. That is the prize if we can address the structural problem.

Just 10 businesses in Scotland account for 45% of all private sector R&D activity in Scotland. Almost 70% of R&D investment is by non-Scottish-owned businesses. Despite higher education R&D rates in Scotland being among the highest in the world, we have seen a significant disconnect between academic innovation and its application by industry in Scotland. There is obvious potential to increase industrial interaction with higher education, and addressing that is a major focus of the innovation centres, such as the advanced forming research centre, that were set up by the last Labour Government.

Much work is still to be done. To match the rate of the top quartile of OECD countries, business R&D investment in Scotland would need to be 90% higher—an increase of £10 billion a year. Companies that are looking to grow are not considering external funding, and that raises questions about the level of growth ambition and whether ambitions can be achieved through internal funding alone. Poor competitiveness in productivity, innovation and capital investment also hinder the scope to drive export sales and grow overall industrial production. Around 60% of Scottish small and medium-sized enterprises trade only within Scotland. Scotland’s exports are also highly concentrated. Just 15 businesses account for 30% of all international exports, and 70 firms account for 50%. Scotland’s key international export markets remain Europe and the USA, with sales to emerging markets relatively low, and five sectors account for 50% of exports in Scotland.

Labour is absolutely committed to addressing the problems we see in our growth and productivity levels, not only in Scotland, but across the entirety of the UK. In our manifesto, we detailed the investment we would make in economic development in the event of a UK Labour Government. In Scotland, that would mean £70 billion over a 10-year period: £20 billion through our proposals to enhance the Scottish Investment Bank, providing patient long-term finance to industry, which the hon. Member for Stirling (Stephen Kerr) mentioned; £20 billion through our national transformation fund; and £30 billion that Scotland would benefit from through enhanced Barnett consequentials. If the hon. Gentleman is so enthusiastic about Labour policies, I encourage him to consider crossing the Floor, instead of having to lobby his Ministers for the same policies.

Scottish Labour has also committed to a proper industrial strategy, which has unfortunately been sorely lacking in the UK and Scottish Governments’ plans. Our industrial strategy would generate high-skilled, high-quality, stable employment for men and women. It would encourage a diversification of ownership models and the governance of our industrial base, encourage and actively support the role of trade unions in the economy, and recognise and resource the critical role of innovation in developing sectors of our economy.

Critical to all those pledges is the investment I spoke about. We must recognise that the role of a Government is to be an enabler—part of a triple helix of private entrepreneurs, research-led universities and an entrepreneurial state, assisting where there is potential to develop sectors, create new high-skilled, high-paid jobs, and sustain and grow viable enterprises.

We must never forget the human cost of failing to address those issues, of a stagnating economy that results in unemployment, and of an economy that is propped up by low-skilled, low-paid jobs, meaning that we have the scandalous situation in which 52% of all adults living in poverty in Scotland are in employment. Whether people like it or not, it is a fact that the UK economy is propped up by low-skilled, low-paid jobs. The Office for National Statistics recently indicated that the number of zero-hours contracts has increased to 1.8 million. That is 1.8 million workers across the UK who do not know what their income will be from week to week. Is that really the way we want our economy to function—built on the back of low-paid and insecure work?

That takes me back to the points I made about our industrial strategy. We have been explicit in our desire to ban zero-hours contracts on the basis that they are exploitative and ensure that our economy is skewed in favour of big business while ordinary working people suffer. If we were in any doubt about the truth of that, we need only to look at the Scottish Fiscal Commission’s findings, which state that real wages are lower today than they were in 2010 and are predicted to continue falling this year. It is simply not good enough.

While the UK Government and the Scottish Government bicker over constitutional intricacies, people are struggling to feed their children. According to the Child Poverty Action Group, more than 230,000 children in Scotland live in poverty. Just let that sink in for a second: one in every four children in Scotland is in poverty today. That should shame every single one of us.

We are on the cusp of a great opportunity, with the fourth industrial revolution now under way. One of the great achievements in Scotland under the last Labour Government was to reverse Scotland’s historical population decline, but there is so much more to do. We need to enhance population growth in Scotland. In 1902, the Scottish Registrar General predicted that by 1962 the Scottish population would be 10 million. Clearly we never achieved that, so we have a great opportunity to make up for lost ground.

We are on the cusp of that opportunity. That is why I am proud to stand here today as a Labour MP who can say that when there is a UK Labour Government and a Labour Government in Scotland we will address the inequalities in our society and the structural problems that we have identified in today’s debate. It is time for the UK Government and the Scottish Government to stop burying their heads in the sand when it comes to such issues purely because they are deemed too difficult to deal with.

We are ready to govern this country in a way that works for the many, not the few. If others are not, I have one message: call a general election and let us get on with it, because we are ready to invest in Scotland and to ensure that Scotland’s economy and people do not suffer anymore due to the short-sighted nature of their current Governments.

Stuart Andrew Portrait The Parliamentary Under-Secretary of State for Wales (Stuart Andrew)
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It is a pleasure to serve under your chairmanship, Mrs Main. I congratulate the hon. Member for Rutherglen and Hamilton West (Ged Killen) on securing the debate. I am sorry that he is not as pleased to see me as I am to respond to the debate. I point out to him that, as my hon. Friend the Member for Moray (Douglas Ross) said, I am a UK Minister. I am proud of being part of a Unionist UK Government, and I will work with my colleagues—and colleagues across the Floor—from Scotland just as much as I will work with colleagues from Wales and, indeed, from my own constituency.

Paul Sweeney Portrait Mr Sweeney
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Will the Minister give way?

Stuart Andrew Portrait Stuart Andrew
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No—I have very little time, in fairness, and I want to get through quite a few of the points that have been raised. This has been a very good and lively debate. I said it was a pleasure to be here. At the beginning of it, I was thinking, “What have I walked into?” However, it is a pleasure.

A fundamental change is going on in the global economy that will throw up both opportunities and challenges for Scotland and the rest of the UK. Automation, artificial intelligence, growing digital connectivity and the need to deliver environmentally sustainable growth will profoundly affect the way that we do business, how businesses function and how people work. As we plan for Scotland’s economic future, the UK Government are confident that Scotland is well placed to take advantage of the changes that will affect the entire economy. Scotland is an open and enterprising nation, with some of the best universities and research institutions in the world. As part of the UK, it has a global reputation for welcoming businesses with high standards, respected institutions and a strong rule of law.

It is the job of Government to ensure that business is ready to respond to change, and that is why we have created the industrial strategy, which is incredibly important. Through the four grand challenges that we have identified, the UK can become a global technological revolution leader in clean growth, artificial intelligence and big data, the future of mobility, and meeting the needs of an ageing society—something that the hon. Member for Glasgow Central (Alison Thewliss) rightly mentioned.

In all those areas, Scotland can make a fantastic contribution. Edinburgh is becoming one of the UK’s most important clusters for AI and digital technology. My right hon. Friend the Secretary of State for Business, Energy and Industrial Strategy has announced an AI sector deal, bringing around £1 billion of investment through public and industry funding. That will ensure that it is a vibrant sector and has the resources and structures in place to survive.

I am pleased that we have already made an announcement about the construction industry, which the hon. Member for Midlothian (Danielle Rowley) rightly highlighted. We will report back later in the year, once all the details have been agreed. I am glad that she raised that. Equally, there is the food and drink sector, which the hon. Member for Rutherglen and Hamilton West mentioned.

I am conscious that time is going fast, and I want to respond to some of the issues that were raised. The hon. Member for Rutherglen and Hamilton West talked about a “third way”. We heard that before with the previous Labour Government, which landed us with a £150 billion deficit. This Government have had to work hard to get that deficit down, which has not been easy. The Opposition Front Bencher, the hon. Member for Glasgow North East (Mr Sweeney), said that those are “choices”. It is the reality of ensuring that we have an economy that is balanced and in which people have confidence, so that we can get the investment we need to create the growth that has brought millions of new jobs for people in this country. We are seeing record levels of employment. That is a record of which I am proud.

Paul Sweeney Portrait Mr Sweeney
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Will the Minister give way?

Stuart Andrew Portrait Stuart Andrew
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No, I am not taking any interventions, because I am very conscious of time.

Brexit was also mentioned. I have heard it said time and time again that the Government are hell bent on a hard Brexit. If anything, we are hell bent on ensuring that we get a deal that works for the UK and the EU. I have faith in my right hon. Friend the Prime Minister. She has achieved agreements when the media and people in this House thought that she could not. Let us have faith in her and support her as she goes to the June Council, and I am sure that we will have a Brexit deal that will work.

I agreed with what the hon. Member for Rutherglen and Hamilton West said about the deficit in Scotland. It is concerning that as a share of GDP the deficit is 8.3% in Scotland, compared with 2.4% for the rest of the UK. That needs to be addressed. Not dealing with the deficit really knocks confidence. People in business will not be confident if it is not being dealt with properly.

We also heard about low wages. I remind hon. Members that it was this Government that dealt with the personal allowance, which is benefiting some 2.5 million Scots’ wage packets. We have increased the minimum wage to a living wage—from £5.80, as it was in 2010, to £7.83—bringing £4,000 a year more to the lowest paid in the country. My hon. Friend the Member for Ochil and South Perthshire (Luke Graham) was right to show the differing figures, comparing the UK performance with the Scottish performance. We on this side are determined to work with the Scottish Government. My right hon. Friend the Secretary of State for Scotland worked closely with the former Economy Secretary in Scotland. That needs to continue.

Some of the comments that have been made today are absolutely right. We have challenges ahead of us, but we also have opportunities. As we can now develop trading agreements around the world, I want us to expand that for the whole of the UK, so that every part of the UK can benefit. Scotland is as important a part of this nation as any other.

As I said, the hon. Member for Midlothian was right to talk about the construction industry. She talked about overthrowing capitalism being a bigger issue. I would say that, yes, it certainly is—and one that would seriously damage the economy of this country. I hope that people will take note.

My hon. Friend the Member for Stirling (Stephen Kerr) talked about a UK investment bank. We are always open to positive proposals to support the economy. The UK Government will consider any such proposal, ensuring that it offers value for money. I will ensure that I raise those points with colleagues in the Treasury following today’s debate.

The hon. Member for Inverness, Nairn, Badenoch and Strathspey (Drew Hendry) said that we were talking Scotland down. We are determined to ensure that our economy works for every part of the UK, and we are working with the oil and gas industry to ensure that there is a sector deal. In the last 10 seconds I have, I say to the SNP that constant talk of independence does nothing to give confidence to business to invest in the UK.

Motion lapsed (Standing Order No. 10(6)).