 blowing the bomb? Good morning, ladies and gentlemen. Welcome to the 25th meeting in 2015 of the Economy, Energy and Tourism Committee. Welcome members, our witnesses, and our guests in the gallery, and I remind everyone to turn the silence of all mobile phones and other electronic devices so that they do not interfere with the silent equipment. We have apologies this morning from the Deputy Commander Dennis Robertson and Joan McCallpin. Item 1 on the agenda, can I ask if members are content that we take item 3 in private? Yes. That's agreed. Thank you. Item 2 on the agenda, we are taking evidence this morning from the Scottish Government's Council for Economic Advisers. I'd like to welcome from the council Crawford Beverage, who is the chair, Professor Sarah Carter, Jim McCall and Professor Anton Muscatelli. Welcome to you all and thank you for giving up your time to come along. I think we've got about an hour, maybe just a little bit longer for the session this morning and we're interested in hearing on a range of issues to do with the Scottish Government's economic strategy, the national performance framework, issues around internationalisation, manufacturing, Scotland's tax regime, the fiscal commission and the current state of the economy and the government's agencies. So I'm sure we'll rattle through that in no time at all. Given that there's four of you, I mean please don't feel you all have to chip in and answer every question, so we'll let you decide amongst yourselves how you want to handle the questions and if you want to agree or perhaps more entertainingly for us to disagree with each other, please feel free to do that. Before we get into questions, Mr Beverage, do you want to say something by way of a comment? If you don't mind, thank you very much and thank you for the opportunity for all of us to come and speak to you today. I last appeared at this committee I think in 2012 in my capacity then as the chair of the council as it was formulated at that time to give evidence on the role and work of the council and myself and several of the other members have been here on different aspects of policy several times since then. The role of the council, I'd just remind you, is to be an independent advisory body to the First Minister. Mainly we are a sounding board for ideas, act as a critical friend to the government and put forward suggestions that we think might make a difference in areas that the First Minister has invited us to consider. Following the publication of the government's programme for government last year, the council remit was refreshed whereas previously we had been tasked with advising the then First Minister on issues such as recovery and jobs and economic levers and internationalisation. Our remit now is somewhat wider and we've been asked to advise on actions to improve the competitiveness of the Scottish economy and actions to tackle inequality. Alongside this, as you'd expect, the council membership was also refreshed and as you'd expect there's been both continuity and change in this so the First Minister has asked several previous members to continue to serve on the council, some of whom you've seen before. Joe Stiglitz from the US, Jim McCall who's here today, Sir James Murley's, Francis Ruane and myself and they have stayed on the committee and then the First Minister also invited several new members to join the council and we were joined by Sir Harry Burns whom most of you will know, formerly the government's chief medical officer, Sarah Carter from Strath Clyde and Mariana Mazzacato of the University of Sussex, Amanda McMillan whom you might know as the managing director of Glasgow airports and Professor Anton Muscatalli who's here with us today also. It's pretty early in the life of this council I warn you to tell you very much about what we're going to achieve. We had the very first meeting here just last March and we're trying to aim at two formal meetings of the whole group a year and then we have several in between times by telephone either one on one with some of the officials or as a group where we've had a couple of different teleconferences. I'm also keen that we continue to engage with others who are involved in improving the performance of the economy and we look for opportunities to do that. For instance, since one of the issues that we were tasked to look at by the First Minister was this area of innovation, as you may know the Deputy First Minister already chairs Innovation Forum called the Can Do Innovation Forum. Yesterday in my capacity as chair I went as an observer to that meeting to make sure that we were aligned and we've now got the officials who serve us both groups aligned with each other so that we don't run into each other all over the place. In the first meeting in March of the year the First Minister asked us to focus our work on some specific areas within the broad remit and these include inclusive growth and innovation as well as around the measurement of the economic strategy and its ambitions through the national performance framework. These are the areas that will form the bulk of what we'll be considering in the course of the next two days while we're meeting together here in Edinburgh. That's probably enough background for now. I think that the convener of you will be happy to take it on questions. Thank you. Thank you very much. You may have the arguments after all. Thank you. Can I remind members as we go into questions if we can keep questions as short and to the point as possible and responses short and to the point because there's quite a number of topics I think we're keen to cover. Can I just start off just picking up the point you made about the Scottish Government's economic strategy which was launched earlier this year. Was that something that you were involved in drafting or were you consulted on the content of that? So the current council was not particularly involved because we were only forming in October, November, December of last year. But a lot of the work that was in that strategy came from some of the prior work of the council. You can't draw a direct line to all of it but there were a lot of the issues that went in there that we had already been discussing in the prior council. So things around innovation, things around inequality, we'd all been getting a reasonable amount of discussion beforehand. Okay. One of the aspects that I think is interesting in the new economic strategy that's quite a departure from the previous one was that the previous commitment about cutting corporation tax has now gone. Was that something you suggested or do you know where that came from? We had had a discussion in the prior council. As you know, the prior council had a fiscal commission subcommittee in there, or at least I think you know that, that was made up mainly of the economists which I chaired and we had spent a lot of time talking about that and when we visited the finance committee Andrew Hughes, Hallot and I were trying to give people an understanding that there were various ways to look at corporation tax which were, you know, you couldn't just look at the actual rate, you had to look at where all the, where a lounge has happened and how much actual take there was. And we had some examples to show different countries where the rates looked very low but the take was actually quite high and vice versa and so we had had some discussion around, you know, could you tailor this in some way towards activities that you might want to encourage such as R&D for example. But we'd never actually gone, I would be too strong to say we made a proposal but we'd had these debates inside the council. So you think that was reflected in the new economic strategy? Yes. Maybe I could ask Jim McCall this question because I know Mr McCall you're quite an evangelist for cutting corporation tax. I mean, what was, it wasn't so much about cutting, it was having control of it because then you can have specific initiatives targeted at certain sectors, you know, industrial sectors. We see it in other countries and we're involved in where the headline might be the same but you would have some flexibility, you know, to encourage or stimulate certain industries or certain activities within companies and the allowance is against it. You know, if you look at R&D, I mean, the way R&D is handled just now is very inefficient and companies don't really, I think, engage in it the way they should. If I compare it with one of our businesses in Canada, in Canada, if you do R&D it gets put through your accounts and the auditors are charged with checking that it does meet the rules, you know, to qualify for R&D allowance and then it gets deducted from whatever, you know, your taxes, it gets deducted so that your corporation tax is based on the net number. Now we seem to have a very complicated system in the UK where it's handled by the tax authorities and you don't get it back and I know I've given the example before that we did claim for some R&D had it refused employed PWC to appeal, won the appeal and it cost us more to pay PWC than we got but we did it out of principle. We haven't tried to claim any since because I just think it's too complicated and that's an area where if you have control of corporation tax then you can, you know, you can play about the way you handle things more efficiently. So it's control of it rather than, you know, the absolute rate. Right, okay, I think Llywodraethan wants to come in with a follow-up on this point. I guess a couple of things just to understand what this shift means in terms of the Government's economic strategy and also your view as a council of economic advisers on that. The Scottish Government has said now, which it didn't say when Alex Hammond was First Minister, that there's no intention to have a race to the bottom. Those words are explicit and also that the previous emphasis on corporation tax cut has been replaced by a proposition for targeted tax changes. What's your understanding of what is meant in the economic strategy by targeted tax changes? I suspect it's what I've just said that you have the ability to vary of the rate. So I think there would still, I'm just surmising this, I would think that the Government would still want to have control of it but would not necessarily want to reduce the headline rate of it but have the flexibility to be more targeted. So we should understand it as still being a proposition around corporation tax exclusively? As an advisor to the Government that's what I would be seeing. That's what they're saying to you when you discuss these matters with? They haven't specifically said that to us. So far in this council we have not discussed the issue of corporation tax at all. We had discussed it as I was saying earlier in principle in the prior councils and just said there are options to do this but it is, as Jim rightly says, it's an issue of if you have the control of it you can then make some logical decisions about what you want to do with it. But your understanding when the Government talks about targeted tax changes to promote competitiveness and reducing equality, it's essentially around a more nuanced approach to corporation tax? I would just echo what's been said. I think if you read the particular page of the Government economic strategy it's exactly that. It's not about taking a blanket approach, it's looking at investment in capital and encouraging growth of SME. You can take a much more differentiated approach if you have all those tools at your disposal. We've seen in other countries also the possibility that you could target employment so there's an attempt to try and which again would fit well with an inclusive growth mechanism where you could say well if you're creating employment as part of that investment there's an attempt to tie that together with corporation tax and Jim has given a good example of where R&D tax credits can work quite effectively and efficiently more importantly. It seems to me that it's a more nuanced approach rather than the previous approach was a headline cut in three pence in corporation tax below the UK rate so there's been a bit of a shift in that. I'll bring in Gordon MacDonald. Thanks very much, convener. You said that one of the issues you're being asked to tackle is inequality and that obviously includes income inequality and that must be tied to growth and employment and therefore connected with economic performance and yesterday's figures for Scotland were pretty poor in comparison to the rest of the UK. Is there any underlying reason for that that we know why we grew by 0.1% as opposed to UK's quarterly growth of 0.7? I saw the numbers only yesterday evening. Anton may have a little more clue to why this is but at the moment I personally don't have any idea about why the growth level was at 0.1. The total numbers are lower than they were in the previous figure. On the other hand it is the 21st quarter, I don't know, the 12th consecutive quarter of continuous growth. I think you can always expect these fluctuations depending on what's happening in the different sectors and also the other thing to bear in mind is that these figures can be adjusted. I think one possible impact here which might have depressed this particular quarter compared to the rest of the UK might have been the onshore element of the oil and gas industry. In fact the UK's figures were boosted by increased production in oil and gas which is attributed to the UK as opposed to the attributed to Scotland so you need to dig below these figures to see what is actually happening. One thing which was particularly strong in these figures which helped, at least maintained them at that level is construction which has been fuelled by public investment. I wouldn't put too much store on one quarter figures. GDP growth does tend to fluctuate a bit. The key thing is the trend rate of growth, not what you would see in a single quarter. That was very helpful. In terms of what you said about oil can I just be clear about that? What you're saying is the growth in oil figures feed into the UK numbers but don't feed into the Scottish numbers, is that what you said? If it's oil production, oil and gas production, yes. Although obviously economic activity was onshore related to that in the Aberdeen area would add to the Scottish figures but yes absolutely. You said about Scottish construction growing and it was tied to economic policy but we were expecting to see further cuts to Scotland's budget so what impact do you think that will have on the economic performance if we're so dependent on Scottish construction to hold our percentage up? Again I wouldn't put too much store on one particular set of figures and obviously if there's going to be a cut in capital spending in the public sector and that feeds through to the Scottish block grant then that would have an impact on growth but you have to look at the whole thing in the round not just at one particular quarter's figures but clearly that would have a negative impact if the next spending review at UK level led to a cut in public spending on the capital side. My other question I was going to ask about Scotland is an exporting country and we export mainly to the Eurozone and we've seen the strength of the pound to the Eurozone it's about its highest level it's been since about 2007 given that the UK has a balance of trade deficit and Scotland has a balance of trade surplus the policy of having a strong sterling what impact is that having on Scotland's exports? Obviously that does create potentially competitiveness issues although you have to take into account that between 2007 and 2013 the value of Scotland's non-oil and gas international exports has actually increased by about 40% so I mean Scotland is keeping its own it's not just about the currency it's also about having a competitive offering and Jim could obviously talk about this given his knowledge of the industrial base in Scotland but clearly what happens to sterling relative to the Euro is going to be important but let me add one other thing actually demand for export for us a prosperous Europe is actually more likely to be a strong pool on our export than simply just the currency Okay, thanks so much Okay, Llewis Macdonald wants to go into the follow-up In fact if it weren't for the growth and construction activity the Scottish economy would have contracted between April and June, is that your analysis as well? Well, yes, arithmetically that's clearly the case but again just the stress I mean the different sectoral elements do tend to go up and down and one tends to offset the other so you can't just look at one quarter's figure and draw conclusions, you need to look at the trend I understood that the one particular sector I'd be interested in your views on and the advice you're given to government on is the oil and gas supply chain and service sector particularly as it impacts on the north-east but clearly that impacts across Scotland What is your own assessment from an economic point of view of the scale of risk that faces the Scottish economy currently with reduced activity arising from oil and gas? Just to stress we haven't provided any particular advice on that area at the moment and I think one of the key things is that you're seeing a lot of companies in that area diversifying, we saw announcements around Wood Group for instance and similar companies I think that's what's key I think what's important over time is that an expertise has been built in the north-east of Scotland around engineering which can be used to diversify and not just base it on that but again just to stress oil prices are incredibly volatile and we've seen a decline I wouldn't personally put any personal bets on what's going to happen over the next couple of years in that area but I think what the lesson of the last year or two has been is that diversification is hugely important even within that sector You're right to emphasise the importance of the expertise that's been built up but I don't think anyone in the sector itself expects prices to go up anytime soon and so I'm particularly keen to understand how the impact of oil and gas UK, the industry body has said something like 65,000 jobs lost already across the UK half or more than half of those clearly in Scotland because of the importance of oil and gas in the Scottish economy that must presumably have an impact on demand for services across the economy and for manufacturing and I wonder one of the things I've been keen to see as some assessment of that carried out by Government or by Government's advisors have you had any conversations with Government about the significance of this scale of job losses on the Scottish economy? We have not had any discussion so far on this but I stress we met for the first time in March and we're still just trying to build up where we might be useful so it may well happen but we haven't to date Presumably Jim McCall being a man with great experience of the manufacturing sector will recognise the scale of importance of this It has had quite a big downturn in employment just now but we've been looking recently at the underlying drivers there and in our own business the North Sea is actually holding up quite well in the Middle East is holding up the Gulf of Mexico is the hardest hit but the reason the reason this is all happening just now is we have an oversupply of oil, demand is lower than supply and we have an oversupply because the Americans did all this fracking and the Middle East are refusing the OPEC countries are ramping up their output to keep their market share now the fracking has the fracking in the US has turned down the jack-up rigs in the Gulf of Mexico are down at 20% now and all the indications are that when we work through this oversupply just now in the surplus that we have demand is going to overtake supply around 2017 maybe 2018 and the price is going to go back up again and activities are going to start again so it is a huge shock in the short term but it's still a viable area to not see the prices will go back up it's more the short term impact on the wider Scottish manufacturing supply chain I'm concerned I think you're reflecting that that is significant it's interesting that last point made by Jim because if you look at Brent Crude the projections for the next three years and indeed the economic active survey it reflects exactly what you were saying in terms of things like seven rigs being closed in the Gulf of Mexico for example anyway the question I'd like to ask is about internationalisation and I do so with some apprehension because I'm speaking in a debate tonight about how Scotland's ethical strategy on trade can open up North Korea I hope I'm able to leave the debate but one of the things we've talked about the Scottish economic success depends on our strengthening links with the global economy and specifically I'd like to ask Jim and Crawford with regard to manufacturing we have been in this committee looking at internationalisation of the Scottish band and Scottish products and while we focus very much on food and drink one of the key areas in my belief is manufacturing we don't seem to be able to deliver the increase in exports of manufactured goods and services that we perhaps might have and I heard Professor Muscatelli saying that the value of international exports has risen by 40% but that's the cash value in terms of percentage of output it has remained fairly stable over the last few years so I'm just wondering on the basis that a new trade and investment strategy is to be developed what are the key factors key tenets that would encourage us to secure a greater proportion of investment particularly in manufacturing I'll remind everybody that by the way how did you ever get into a debate that sounds that complicated in the first place somebody says I look Chinese I don't know did you remind us that most of our companies in Scotland are small and medium sized enterprises and from my erstwhile career in Scottish enterprise it was my experience that many of those were just very worried about exporting at all they just didn't know how to do it and for a long time we had really only provided them help into a couple of markets into Europe and into North America as the other parts of the world have expanded my ex-colleagues have set up offices as you know in many of those places and they're now working in account management system with a strong drive to try and help SMEs to understand how they can go about going into places like China or South America or so on and I think it just takes time for them to be able to get people convinced to get out of their comfort zone of being able to just manufacture in Scotland and stay in Scotland and then figure out how to tackle the wide world there are no huge legal problems if they just get some help in the right directions so I think it's really a matter of education and I think people are focused on trying to help with that exact problem Jim? I would agree with what you say it was companies really not knowing how to break into the markets but I think one of the other issues and it's a serious one is the financial support to these companies with what's happened to the banks it's not easy for these companies to get debt finance and more importantly if you're selling overseas very often you have to put up a bank guarantee that covers the cost of your exports now that's treated by the banks just now as core debt if you're a small company you're able to get it within your debt capacity now that you do have through the UK the export credit guarantee system and we had a particular involvement in that when I was involved in the pumps business where I was on a trip with David Cameron to China and I told him on the trip that it was great that we're trying to drum up business for the UK but it was a pity that we wouldn't be able to exploit it because when we get the orders we wouldn't be able to raise the bonds to support it now he did follow up with that and put in place through I got a call from export credit guarantee to say that number 10 had been on to them giving them three months to get a trade support package in place now it didn't six months later it was in place and we got it for a pump order for China but it's very difficult to get and that was just to showcase that they had actually put it in place it's not efficient and smaller companies find it absolutely impossible so I would think it would be much more appropriate if the Scottish Government had control of something like that for Scottish companies and also for domestic jobs as well you have to put it up I'm seeing that just now in a business we're in and Finvera in Finland one of the biggest companies we got in terms of money committed to it is in Finland and the Finnish Government have a Finnish investment bank that can lend to small companies up to 250 employees I think it is they will lend to they will put bonding in place for export jobs but they will also put it in place for domestic jobs and they will give them support they work with banks but they stand behind it and guarantee it and when I was in the pump business when I was explaining this to the Government at the time we went to China I could have I had to move one job to France because the French Government back 80% they give 80% backing to their industrial businesses another one to Canada where it's 100% backed by a Government guarantee now these are contingent obligations you don't have to give cash you have to stand behind it and I've never heard of one been called but that's something that I think would make a significant difference to the the opportunity or the people the small companies been able to exploit the opportunities that are there overseas and there are plenty of them this question really is a full on because we need new products and services to go to market and the international aspect is very important I wonder if I can ask Professor Carter and Professor Muscatelli in one of the conversations we had only two weeks ago with the universities regarding wages, work and wellbeing was the need for innovation and of course innovation in partnerships at the heart of our exports which are critical to economic success one of the things that was surprising was when we asked the question what involvement universities might take for example at Stanford you will know the level of equity participation that universities take in new products ensuring they get to market we were told in Scotland that they would go and look at this they hadn't looked at this isn't there a need for the research and development that we require and a lot of that comes out of the universities for a greater involvement and understanding of the business and internationalisation of the products that are developed if I can answer that question from the perspective of SMEs because of course much of the innovation that is undertaken in universities is exploited by either spin outs or local companies and many of Scotland's universities give a huge amount of support to supporting the SME sector if that's through innovation whether it's through support for management whether it's through connecting small firms with for example funders bankers the corporate sector as far as their concern and they do but in terms of equity participation involvement it seems to be lacking can I ask Anton Muscateldy to respond to that one? I think one of the things that certainly is scarcer not only in Scotland but across Europe compared to the US is certainly the availability of venture capital in these circumstances having said all that there is an attempt to try and draw closer and ensure that there is co-investments by universities and also companies I'll give you two examples of that recently a US venture capital organisation the site established a fund around investing in Scottish life sciences Epidarex capital three of the Scottish universities including my own put money into that some of that is now being invested back into a number of businesses not all our own it's not an exclusive fund in any way it's investing across the Hall of Scotland I think it's a good example of pump priming capital which has now led some of these companies to actually grow quite substantially but I think if you look at other ways in which we need to feed the interface and it comes back to the point which Crawford mentioned which is trying to join up the innovation ecosystem in Scotland through the can do forum innovation innovation centres which is something that public money has been put in through the funding council an interesting experiment in that regard my own university provides the base for two of them which is one of them is stratified medicine and the other is sensors and imaging stratified medicine a lot of the initial spade work to try and translate this amazing research which is happening in Scotland that requires public investment there is no other way to do it because these are new techniques there's no way in which you're likely to get private money all idea of these innovation centres that initial public investment creates a number of exemplars which hopefully will then lead to investment in jobs and growth and there are different examples depending on the different innovation centres so I think we need to there are no easy answers in this space because it's where we would have discovered them by now but I think we need to feed off the fact that Scotland's universities provide two thirds of our R&D if you look at our total R&D figures in fact as I think we're fourth in the OECD in terms of as a percentage of GDP the amount of R&D that comes out of the universities and that's not reflected in business R&D but we need to use that base that's where we I think that has to be the point of departure in order to grow it because we have a fantastic asset but we need to look at the interface between that and the business sector just going back to the R&D I think what we spoke of before is something that you do get more you get higher levels of R&D in companies overseas but there are different systems to support that R&D which I would I would put forward as why you get more R&D in there but also in the innovation process or in innovation it's not just innovation about products or technologies I think you have to look at innovation in processes, marketing and the software areas like that maybe there's not enough there's not enough attention just now and one big difference between Scottish universities and Americans you mentioned Stanford are an investor in our business and I go and see them regularly they have an endowment fund of something like over 20 billion that they invest from and that's just not a luxury that Scottish universities have so it's very difficult to compare the two and I think what it does prove that when you invest in it the concept is right we started with 20 billion it absolutely proves that if you invest you get better results I wanted to explore with you whether the Scottish Government's economic strategy has the context right, the first section on context begins Scotland has strong economic foundations and perhaps understandably there's an emphasis on the positive I'm wondering whether the strategy ought to have some greater recognition of the risks that the Scottish economy faces do any of you have general comments about whether the strategy properly assesses the risks that we may face in the future and what those might be well let me take a start from my reading of it I thought that it did a reasonable job of balancing those things out one of the things that we are trying to look at here is that we've got our remit as you know is how we deal with inclusive growth for example and one of the ways that we want to do that is to try and be mindful of the fact that there can be downsides the way you put policies in place for things like that too and so we need to find a balance that says how are we mindful of both the risks and opportunities in being able to drive in that particular direction so I think in the implementation of the general theme there is a lot of attention being paid to trying to make sure that we understand exactly how much risk there is in what is we're going to try to do you may be right it may not be spelled out enough in the context of the document itself but I think people were mindful of the risks as well I've seen a number of people commenting that the combination of wealth and income inequality in the UK as well as the level of debt the UK government's focused on public debt but the level of private debt is vastly bigger and the operation of the finance sector indicate that the conditions could be right for another economic crash wealth and income inequality are addressed you're quite right but there's nothing at all about debt nothing at all about how finance is operating and I'm wondering if some greater recognition of what might be the risks of a further crash or recession and what the necessity is for resilience in the face of that possibility I think it's a really interesting question and I think this is something that we might well discuss at the council for economic advisers over the next two days but what impressed me about the economic strategy was the fact that while we might not be have articulated all the risks that we might have done or it might have done in actual fact I think that in mitigating those risks I think it did a very good job because one way that we mitigate the risks the future risks of an economy is to include more people and more participation and greater growth and I think the whole element of inclusive growth and actually goes some way to mitigate these risks if we think it's already been mentioned that much of our business structure is made up of SMEs one of the ways that we mitigate great risk in the economy is to actually have a more thriving diversified SME sector and that to me would be a very important way of mitigating the risks I certainly agree with that latter point about diversification and you know small and medium businesses rather than the domination of a handful of multinationals in many sectors I won't pursue the question about growth because ideologically I bore my colleagues regid on that question quite frequently one other risk that I would like to ask you about relates to the speech that Mark Carney gave last week about climate change take for example he said in his estimate of a carbon budget that would likely limit global temperature risks rises to two degrees above pre-industrial levels which you'll be aware is not a safe level but regarded as a maximum tolerable level of damage that budget amounts to between one fifth and one third of the world's proven reserves of oil, gas and coal if that estimate is even approximately correct it would render the vast majority of reserves stranded oil, gas and coal that would be literally vulnerable without expensive carbon capture technology which itself alters fossil fuel economics he later says a wholesale reassessment of prospects especially if it would occur suddenly could potentially destabilise markets spark a pro-cyclical crystallisation of losses and a persistent tightening of fiscal conditions he had me until pro-cyclical crystallisation but I'm assuming Mr Carney thinks it would be bad the Scottish Government and its economic strategy seems to regard the oil and gas sector and its dominance in our economy only in positive terms only as a positive value not as a potential liability not as a vulnerability doesn't that need to be broadened particularly in light of this argument that essentially fossil fuel divestment is no longer merely an ethical concern but an economic one I mean the solutions to the problem is has to be a global one it's not one that a small country can solve by itself but you're absolutely right that clearly whatever measures are taken in terms of global attempts to counter climate change would need to be factored into any country's economic strategy but I think that the problem at the moment is that I mean I think the Governor of the Bank of England was right to warn I mean it's one of those one of those unknowns but huge risks that the global economy faces but to be honest it's difficult for a small country to in itself act unless you're looking at the overall global framework of how you would respond to that certainly diversification as you mentioned is the right thing to do but if you take this as the starting point it's in itself the action which would make substantial difference to the global climate change challenge Can I just pick you up on that in terms of climate change our impact on the climate that's quite right it requires a global solution and every country has to be part of it but in terms of the economic vulnerability from a carbon bubble that is something which is relevant to the way a domestic economy operates and Scotland's economy is more exposed than most to the situation of an industry which is setting on what will become stranded assets and I think it's it's something that needs to watch just in the same way as you pointed out earlier that the whole world is still in a very delicate condition in terms of the financial situation again that's something which we don't control but José Vinyals was from the IMF which is pointing out that whilst many OECD countries have taken action to shore up their banking sector the same hasn't happened in many emerging markets now all you need is another shock to that and then that puts us all in a very difficult position just to come back to the earlier question you asked so I see it in a very similar light absolutely we need to build resilience we need to look at the diversification but I think we are where we are in terms of how this economy has developed and yes we need to become more resilient absolutely I would certainly agree with that Did Professor Carter want to come back in No I completely agree with Professor Muscatelli's comments here one of the great attractions I think of this new economic strategy is the focus on SMEs and inclusive growth the participation for example of women and also our ethnic minorities our BME and our refugee populations it's important not only economically but it's also important in terms of social integration as well and those are also other risks that have to be considered so for me I support everything that Muscatelli's suggested and and really echo the focus on SMEs Thank you I want to come in Following up on Muscatelli's agreement with Patrick Harvie's line of questioning around carbon and hydrocarbons if indeed you do take the view that carbon and hydrocarbons and diversification are urgent and Jim McCall talked about the short-term impact of the current oil and gas downturn will you offer advice to the Government about how it responds to the current oil and gas downturn or will you wait to be asked We respond to what the First Minister asks us to give advice on so far we have not been asked around this area but we stand ready to help in any way we can I think we've just heard from one of your colleagues a recognition of the seriousness of this Do you have no mechanism for drawing issues to the attention? Absolutely not, as we start the meeting we start the meeting today at 1.15 we can certainly bring that to attention, say it was one of the big issues from the council, from the conveners here and One of the areas that the Government are looking at is trying to get more industrial manufacturing grow that sector and I think that's what you need to do on construction oil and gas and financial services you know we need to grow other sectors and there's definitely a focus from on growing the manufacturing sector as well Can I maybe just ask a process to follow on from what Lewis MacDonald said a process question You're a council economic advisers but you don't actively offer advice You wait till we asked Is that right? It's not so much In every council we've had from the first one we set up in 2008 the First Minister has said here are the things that I would like your advice on It doesn't mean that we can't go back as a will today and say that from this committee there were some issues raised that we think you might want to consider having us take a look at but generally speaking we respond to what the First Minister wants to do When the Scottish Government revised its economic strategy to test that against its independent advisers it published it and you have made some comments on it but you hadn't a role at any point to say well we maybe wouldn't do this maybe the consequence of that didn't happen We actually had a process last year where in the previous council where we actually met the night before without any Government people there to discuss things that we thought were important to raise so there were a number of things come out of that that we did raise wasn't always accepted but we I think that's a whole set of questions in its own but so the Scottish Government can establish a new economic strategy with a nuanced approach on taxation as opposed to a very clear position in taxation without testing that against your views Well it would have pre-tested it is the issue most of the things that are in the economic strategy we talked about at some point during the work of the council but I think it would be unreasonable for us to ask the Government to run it by us and say can you approve, review they've got to go do their own thing with that all we can do is talk to them in advance about those areas where we thought we had competence Individual phone calls with some of the economists and so on just to bounce things off them The role and job of the Government to develop an economic strategy it's just whether there's a transparent process by which they test their decisions against their own economic advisers or not and that's obviously not your responsibility Can I ask on specifically round take from what you're saying that you do support the notion of inclusive growth and my understanding of that is that in growth you ensure job creation and good quality jobs perhaps and also that people have access to them who are further away from the jobs market If that is the case do you think that you would would it be worse your while exploring, reviewing for example the role of Scottish Enterprise which moved from having responsibility for people in place to simply looking and there's an argument for it these are the growth sectors we want to see investment in Scottish Enterprise is part of strategy for inclusive growth they should have a responsibility for identifying groups of people who are far away from the market or areas where you could ensure that there is access to good quality jobs My understanding is that they do have a remit around inclusive growth both in terms of bringing more people into the workforce but also in terms of geography because we want to be inclusive by geography we don't want all the jobs to turn up in the central belt of Scotland and the rest of the country to be just ignored and I know they are working very hard in the geographical aspect of what they are trying to do in that regard May I answer I think that Scottish Enterprise has in the past focused mainly and possibly quite rightly on its account managed companies these companies that have met a certain threshold that have the potential to grow further to innovate and to internationalise their offering and I think that that's quite appropriate I think where the issue around inclusive growth is concerned is that when we look at the companies and the people who run those companies it didn't seem to be reflective totally of all parts of the economy and left some people excluded I think that's an economic risk if you like because by excluding these people or their non-participation of people and sectors and geographies I think that Scotland loses out my understanding is that Scottish Enterprise have embraced the notion of inclusive growth do not see it as being in any way conflicting with economic growth but it's actually the two pillars on which this economy will grow and because of that I think we've seen a greater involvement of people who perhaps haven't been supported by Scottish Enterprise are now being included in the economic agenda too I think that this is a bigger issue for the welfare side and skills development Scotland are a devolved issue but Jobcentre Plus and so on is reserved and they're not tied up and it's more about I think this is more to do with Government policy than Scottish Enterprise I think they would contribute most by helping more companies to internationalise their business and grow their business there are things like equality of opportunity there are people at the bottom end coming out of school who are not given equality of opportunity they've got challenges that aren't met just now and we need to support these people to get them into a good job there's also the wages I mean I don't think the Government should be subsidising low pay with employers should be paying enough for people to live on not having to get through tax credits support to subsidise low pay in companies so there's a whole issue a whole load of things there that need to change that I think is not a Scottish Enterprise issue I think also an important point is that the strategy is a framework with these two pillars and the cross cutting themes but the concept of inclusive growth which is relatively recent one which the OECD and other agencies have internationalised has embraced are about trying to construct a framework on how you're progressing against an agenda of inclusive growth so you would come up with a number of indicators which would give you multidimensional aspects of living standards so it's not just about the economy it's about health, it's about other dimensions so I mean the way I would see this emerging I imagine is that we will provide Government advice, the Government will come up with a more granular way of measuring progress against these aspects of inclusive growth and then you would see that filtering through Government agencies including SC and others so I think the strategy provides a framework but clearly where we can provide advice is in looking at what is international best practice in terms of developing the sort of more granular aspect how you measure inclusive growth how different measures impact on different indicators and therefore the set of policy choices which the Government has I mean I don't think the whole job is Scottish Enterprise clearly however Scottish Enterprise out of its budget has just left 10% for inclusive growth how can that possible be a twin strategy if most of their work is focused on identifying investment opportunities in the key sectors we all know that it's possible to grow the economy and leave some people as far away from the job market and being involved as if you have a low growth economy would you say in your advice if Scottish Enterprise is in favour of a twin track is acceptable then simply to use 10% of their budgets on it if they ask your advice what would you say I'm not sure if I qualify to figure out how the Scottish Enterprise people should spend their budget but you know I I mean we have to they know that this is an important part of the Government's economic strategy and I assume that they have taken pains to make sure that they are spending enough to be able to do what they can do with it a twin track approach which is different from the old approach inclusive growth it looks like a fair split for you for the Scottish Enterprise only to be split if you were asked 10% would cover it doesn't feel as if it's talking about identifying economic social risk and shifting to geography and communities and groups who are excluded as if it's largely the same as before with 10% budgets really very small surely Personally I would support a further focus on inclusive growth Do you think Scottish Government in all of its agencies I mean I do think that one of your jobs surely must be to lift the strategy off the paper and say these things need to happen in order for it to actually be inclusive growth Well I think as Professor Muscatallis described this is a framework we're asked for advice and we will give that advice to the best of our ability based on our expertise maybe this will come up in discussions in the next couple of days I think also another important element is that where we've seen around the world in other countries attempts to put in policies for inclusive growth these are not simply exercised by government through single policies either in tax or benefits by joining up different agencies and making them work better together so it's difficult for me to answer your question about AC partly because I need to look at the detail of how that that spend, that 10% spend interfaces with other elements to spend across government no doubt that will be part of our discussions by 230 today it's part of our discussions In governments everywhere are feeling their way through this example is sees Scotland as an incubator for the inclusive growth area they think the things we are starting on are correct but nobody has all the right answers here and lots of countries are trying to tackle this at the same time, we're learning from each other about what you can spend what differences you can make it's going to take some time to do this You have a role in scrutinising other organisations that be part of inclusive growth around education for example when if somebody is leaving school without the basic skills education becomes critically important skills development in Scotland becomes critically important will you be looking at their budgets and the emphasis within Scottish Government budgets on being inclusive around development of skills in order to deliver an inclusive growth strategy If I can give my personal opinion which is simply things I've said already in public on inequality there's absolutely no doubt that one of the biggest positive impacts on reducing inequality is investment in early years education so if you look at all the evidence around the world it's about betting that in through early years education childcare these are sort of policies which take a long time to have impact let's not pretend they're going to solve things immediately but these are exactly the sort of things that could have a transformative effect on employment and growth in the long run that's what we've seen certainly from Scandinavia from other European countries so that's a personal view which I will certainly be articulating in any engagement I had on inclusive growth with the Government and as you say also further on trying to match skills properly to the need of the economies and other important element but personally we know from most economic evidence the biggest bang for a buck comes from investment in the very early years also investing in the parents who are supporting their children so second chance education you could argue is absolutely critical as well we don't want to write off a whole generation who didn't get that benefit at the early stages indeed okay, I'm conscious we've been running for an hour but two members still want to come in sorry, Lewis Macdonald you'll be aware that Scotland's devolved government is moving into a whole new phase over the next few months and over the next couple of years of fiscal devolution in terms of our responsibility for setting tax rates but also opportunities for borrowing the creation of a new fiscal framework part of the structure around that is a fiscal commission but I'd be interested in your views and what advice you might offer to ministers about a couple of aspects of the proposed fiscal commission as it currently stands one of those is its ability to initiate its own forecast and fiscal forecast and the other is the independence of the commission I wonder if you have either individually or collectively taken a view on these two important well, let me start and maybe Antel might want to come in the fiscal commission was something that grew out of the fiscal commission working group that we had as a part of the prior council and I would say on if you look at what fiscal commissions do throughout the rest of the developed world that we did at the time most of them have some degree of independence ideally total independence which is I think where we would have come down on this thing and most of them also take an independent view of the economy and where it's going and those were a couple of the pillars on which we had built that but there is a I'm sure you can it will be available on our website but there was a wide range of views throughout the world in terms of when they set up their own fiscal commissions but certainly the side that we came down on and the fiscal commission working group was for both independence and for independent review of fiscal affairs that's very helpful you'll be aware of the views of a number of bodies the Institute of Chartered Accountants in Scotland is the one that I have in front of me at the moment saying that the way that the fiscal commission is proposed to be set up at the moment is independent because it's being set up within the Scottish Administration who will provide reports on accounts at the request of ministers and the functions of the fiscal commission can be changed by statutory instrument do you in that respect agree with the suggestion by them and other bodies that this proposal falls short of the level of independence that you advised was the best way forward? To be too fair I haven't read what the accounts have been saying about this but I think the more independent we can make these things obviously the better experience again from around the globe seem to tell us that the quality of the people that you put on to it helped dramatically and even if it was within governments but there were strong minded competent people running things that you would be likely to get a reasonably independent view again it's clear from the draft of what is proposed at the moment that the fiscal commission will be asked to comment on the government's forecasts but will not be empowered to make forecasts of his own do you think that again that is different from what you're... I'd like to second guess the government on this one I think they need to make their own decision about where it comes across we certainly gave them a wide range of views about how different fiscal commissions work and I think it's for them now to take that forward and the way they think will work best I would like to ask was closer to home I guess the Royal Academy in their evidence the finance committee said that the commissions independence the fiscal commissions independence would be strengthened by ensuring that a commissioner may not at the same time service a member of the Scottish Government council of economic advisors does that seem to you sensible given the... discuss that at some length in the council and that was what we thought to thank you very much that was an exceptional issue to that line of questioning I think we are entering an interesting time in Scotland where we'll have much more fiscal power devolved and the Scottish Government will have many more levers at its disposal in terms of the economy how well served do you think we are in terms of objective economic analysis of government decisions I'm not thinking about the fiscal commission specifically I'm thinking about the net world for example do we need more think tanks who are going to advise government on test government policies and proposals I think you'll find that there will be much more interest by existing think tanks and existing academics as well I think it's interesting that IPPR for instance is a set of a base in Scotland I think that you'll find existing think tanks like IFS probably spending more resources on this I think as the evolution progresses I think there's no doubt in my mind that independent academic economists will find this a really interesting thing to analyse it'll be interesting to see I personally do think that in the past Scotland perhaps hasn't had its fair share of think tanks partly a lot of them have been London centric and have tended to pay too much attention perhaps to national as opposed to what's happening either at a country level or a regional level but I have no doubt that there will be a response to this because these are really interesting times as you say So if you knew of any wealthy entrepreneurs who might want to fund think tanks who might do this work you might suggest their names to us Okay, thank you very much Okay, check for me Yes Good question The oil earlier today in the impact on the Scottish economy and while I have a lot of sympathy with my colleague Patrick Harvie's view and the impact of oil of course it's a major ingredient in many of products enrolled in medicine and what have you and I've just spent three and a half years doing a project on trying to get the UK Government to look at oil and gas in the Clyde and the Atlantic margins but one thing that we haven't done is look at the rare earths that are available in Scotland I just really want to ask you to try and get this on the agenda Northern Ireland ran what they call the TELUS project in 2005 to look at the geological impact or assets of Northern Ireland they spent £6.5 million doing that project and when they found out what was there they issued licences for exploration to the tune of £17 million and now they are developing exploration for gold, silver and cobalt the geological structure of course runs across into Scotland in fact we have just helped some guys to introduce them to entrepreneurs to get funding to licence drilling for gold, silver and cobalt in the south west I can't say where because I've signed but I do have a rock with some gold in my office can I ask that when we look at the assets of Scotland that we try and encourage at some stage an investigation into particularly given that the global situation regarding rare earths that we at least get some idea the benefits and the assets that Scotland has in terms of the rare earths at Aberlarfee I'll raise that also Thank you If you do I'll tell you where the gold is Gold rush Okay good I think that's the end of our questioning on behalf of the committee thank all the witnesses for coming along today and giving us an insight into the work of the council for economic advisers and I think we do very much appreciate the input and I hope we can repeat this session at some future point perhaps with the new committee in the new parliament Just before we suspend and go into private session I'd just like to mention to committee members that this is our committee assistant Lindsay's last meeting with us Lindsay is moving on to do moving on to the presiding officer's office so this will be our last meeting and we wish you well Lindsay Under that we'll suspend