The Scottish Government’s National Strategy for Economic Transformation (NSET) is intended to guide its economic policy throughout this decade. It aims to deliver a ‘step change’ in Scotland’s economic performance.
There can be a lot of ‘noise’ around the economy, with small movements in monthly statistics generating headlines and debate. NSET’s annual progress reports provide an opportunity to step back and assess Scotland’s economic performance against the Scottish Government’s longer-term ambitions.
They also aid Parliament’s scrutiny of the Scottish Government’s economic policy.
This blog summarises the third annual NSET progress report.
What’s in the Scottish Government’s strategy?
The strategy is split across five ‘programmes of action’, all underpinned by a sixth, which is focused on delivery. The programmes indicate where the Scottish Government’s priorities for economic policy lie. Within each programme, the strategy lists actions that the Scottish Government has committed to, as well as a series of metrics that it aims to improve.
Programme 1: Enterprise and innovation
Actions within this programme aim to address relative underperformance in the creation of new businesses, the scaling up of successful companies, and the share of businesses developing new products, services and business practices.
Programme 2: Investment
Over recent decades, the level of capital investment (both public and private sector) in the Scottish economy has lagged international competitors. Programme 2 aims to narrow this gap and attract international investment in Scotland’s economy. It also aims to expand Scottish businesses’ activity in new markets – both geographic (i.e. exporting overseas) and industrial (i.e. in growing industries, such as renewable energy, the hydrogen economy and life sciences).
Programme 3: Productive businesses and regions
This programme aims to improve productivity performance across Scotland’s regions. Productivity is a measure of outputs for a given amount of inputs. Economists often measure productivity as output per hour worked, as there is a strong link between increasing this metric and growing real wages and living standards over the long term. The Scottish Government estimates that if Scotland’s productivity matched the OECD top quartile, annual wages could be almost £3,850 or 10% higher.
Programme 4: Skilled workforce
This programme aims to upskill and expand the size of the workforce. It highlights population challenges in rural areas and points out that technological change and the transition to net zero will bring changing skills requirements.
Programme 5: A fairer and more equal society
This programme aims to increase wages, tackle poverty and improve measures of wellbeing. The strategy aims to focus on “the sectors where low pay or precarious work are most prevalent”, deliver the fair work agenda, and reduce structural barriers to participation in the labour market.
Economic outcomes
The progress report presents a series of economic metrics that the Scottish Government aims to improve. We’ve summarised these below and, where applicable, added equivalent figures from previous years’ NSET progress reports. In analysing these figures, there are two points to note:
- Economic performance can be cyclical, whereas NSET aims to achieve structural changes in the economy. This means that to analyse whether the strategy is working, we should focus on longer-term trends, rather than short-term fluctuations. This is the third annual progress update, so it’s perhaps a little too early to draw firm conclusions about how NSET is delivering, given that it is intended to apply to a 10-year period.
- There is a time lag between government action and impact on the wider economy. Furthermore, it is difficult to draw a straight line between the actions of a government and their impact on economic outcomes. Therefore, changes in Scotland’s economic performance (good or bad) are not necessarily a direct result of the Scottish Government’s strategy.
With the caveat that some prior year figures are skewed by the Covid-19 pandemic, all of the headline metrics are either moving in a positive direction or flatlining.
That said, the recent year-to-year changes are generally in line with pre-pandemic trends. It’s difficult to spot any signs of transformational changes in economic performance.
Gross domestic product (GDP) growth has returned to broadly in line with its post-financial crisis average after some significant fluctuations between 2020 and 2023.
Income tax receipts have grown markedly. Figures above are expressed in nominal terms, but even in real terms, they have increased by 3.9% between 2021-22 and 2022-23, followed by 6.2% the year after.
The Palma ratio measures the incomes of the wealthiest 10% against incomes of the poorest 40% (so a reduction in the ratio would be the Scottish Government’s aim). Income inequality appears at first glance to have fluctuated significantly but comparing with trends in the 2010s when the ratio oscillated around the 20% mark, the 32% recorded in 2020-23 is an outlier.
The Natural Capital Asset Index (a measure of the quality and quantity of terrestrial habitats in Scotland) has seen no statistically significant changes since 2017. Regional inequality has remained steady, although the latest regional figures are now a little out of date. Greenhouse gas emissions have fallen to 51.3% of their 1990 levels. For context, the Scottish Government’s 2026-2030 carbon budget requires an average emissions reduction to 57% of 1990 levels.
Beyond the headline metrics, there is too much to analyse in one blog. But a few things stand out.
Capital investment
First, the level of capital investment (measured by gross fixed capital formation) in Scotland’s economy is increasing. Capital investment includes spending on things like buildings, equipment, plant and machinery and software, and is considered to be a driver of living standards over the long term.
Capital investment as a percentage of GDP has increased from 18.2% to 18.4% to 18.6% across 2022 to 2024. This is its highest level since 1998, but still below the OECD average of 22.3% in 2023.
Productivity
Productivity – another key driver of living standards – appears at first glance to be increasing, from £40.50 to £42.50 per hour worked in 2023. However, these figures are in nominal terms, so don’t account for inflation. In real terms, productivity actually fell by 1.1%. Also, provisional figures for 2024 were recently published and show a further 1.5% fall.
Skills
Finally, the metrics paint a mixed picture around skills. Skills shortages seem to be receding. The number of young people in education, training or employment is high and rising. The percentage of adults with low or no qualifications has ticked up but is broadly flat across 2022 – 2024.
However, the level of under-utilised skills is rising at a time when fewer businesses are reporting their workforce digital skills needs are being met. Also, there has been no measurable increase in the percentage of working age adults receiving job related training between 2022 and 2024.
Conclusion
All in all, Scotland’s economy has continued its recovery from the turbulence at the beginning of this decade. However, time will tell if a sustained ‘step change’ in Scotland’s economic performance will materialise.
Rob Watts, Senior Researcher, Financial Scrutiny Unit, SPICe