 Good morning, everyone. We've reconvened in public session for the continuation of the 13th meeting of the Economy, Jobs and Fair Work committee. My welcome today Keith Brown, Cabinet Secretary for the Economy, Jobs and Fair Work and Michael Russell, Minister for UK Negotiations and Scotland's Place in Europe. The ministers have with them a number Scottish Government officials to assist with the questions to be put to the ministers. Those are Gary Gillespie, the chief economist, Simon Fuller, who is the OCEA economic analysis division and George Burgess, deputy director for EU and international trade and investment policy. If I could ask the cabinet secretary to begin with a short statement which he's prepared, and then we will move into questions from committee members. Thank you, convener. I thank the opportunities to contribute to the investigation that the committee is having on the potential economic impacts of the result of the EU referendum. I certainly welcome the scope of the committee's considerations and look forward to receiving the committee's recommendations on these areas, and as I say, welcome the opportunity to appear today. When I did appear before this committee on the 28th of June, which of course was less than a week after the result of the EU referendum, I highlighted several things. First of all, the result had changed the economic climate in Scotland, the UK and indeed the whole of Europe. It would inevitably lead to a period of economic uncertainty and it would add to the already significant external headwinds facing the Scottish economy. I was also clear that the Scottish economy was facing these headwinds from a position of relative resilience and strength. The experience over the past few months has underlined those points. First of all, Scotland's economy grew by 0.4 per cent in the three months leading up to the referendum, which had been the highest rate of quarterly growth since the start of 2015. Scotland's labour market has continued to perform strongly. The latest data shows that the employment level in Scotland is now 40,000 above its pre-recession peak and 166,000 above the recession trough. The unemployment rate in Scotland has fallen to 4.7 per cent, lower than the UK's rate of 4.8 per cent. So, despite continuing economic concerns following the EU referendum result, it is encouraging that the underlying resilience of the Scottish economy remains strong. However, if we start to look ahead to the next 18 months, the outlook for Scotland in terms of growth and indeed for the UK has weakened following the referendum. Economic forecasters have significantly downgraded their growth projections for 2017 to reflect the heightened uncertainty and increasing inflationary pressures following Brexit. All of that will start to dampen employment prospects, business profitability, household incomes and earnings. Longer term, we also know that the independent economic forecast points to a range of possible impacts for the economy from a redefined relationship with the EU. There is widespread agreement that a UK-EU trade relationship reliant on WTO rules, or what is often called a hard Brexit, represents the worst possible outcome for trade and for the economy. So, the path ahead is uncertain, but we are very clear that Scotland's relationship with the EU and its place in the single market must be protected. We have, as you know, convener a small open economy in a rapidly changing and globalised world. Our ability to create a more productive and fairer Scotland depends more than ever on trading with the rest of the world and attracting investment into our economy, into our businesses and assets. Being part of the EU makes easier the free movement of goods, services, workers and capital, it opens up opportunities for citizens, workers, businesses and consumers. Any relationship with the EU short a full membership of the single market risks increasing barriers to trade, as well as reducing exports and lowering migration, all of which will affect the rates of growth but also reduce productivity. The Fraser Valander Institute has estimated that leaving the single market under a world trade organisation scenario could result in our economy being worse off by about 5 per cent overall, about £8 billion. After a decade, and that's compared with the position if we were to remain in the EU, that is 80,000 fewer jobs and real wages lower by £200 a head a year. And there is a fairly rare consensus from economists who often don't show a consensus and various think tanks on the issue of Brexit. Alice has shown that it will be bad for exports, for investment and for jobs, and that means that it's bad for productivity, for economic growth and tax receipts. That view is also shared by the OBR and indeed the Treasury. It was set out quite clearly by the chancellor during his autumn statement. Brexit has lowered the outlook for economic growth and has in turn led to forecasts of increased borrowing to the tune of more than £100 billion over the forecast period. Ultimately, for households already dealing with the impacts of austerity, Brexit has led to a rise in inflationary pressures, which combined with a benefits freeze and a weaker outlook for earnings will squeeze incomes further. Crucially, analysis by the IFS Institute for Fiscal Studies shows that by 2021 wages will still be lower than they were in 2008. That implies 13 years without any growth in real wages, along this period of stagnant wages since World War 2. There is therefore a pressing need for us to try and minimise this potential damage. That's why we have been unequivocal on the importance of membership of the single market and on our determination to retain that membership. That's not to say that we prioritise our trade with the EU at the expense of our trade with the UK. We're clear that we want to maintain our relationship with vital partners. The two are not incompatible. We've heard from David Davis that there won't be a hard border between Northern Ireland and the Republic, and I'm confident that the same would be the case between Scotland and the rest of the UK should Scotland be able to secure our relationship with the EU. We are currently in the process of opening a trade and investment hub in London to attract further investment north of the border, building on recent post-EU referendum investments from companies such as Chevron, Aircraft Maintenance and also GlaxoSmithCline. Those investments, I believe, are a vote of confidence in the economy, and the Scottish Government is clear that we remain open to investment from the rest of the UK, from Europe and from further afield. However, as I alluded earlier, it's not just a vote to leave the EU that's proving an unnecessary headwind to the Scottish economy. We're also hamstrung by much of the economic policy led from Westminster. On oil and gas, the chancellor has chosen not to implement the strong package of support that is needed for the North Sea and which has so gravely affected those communities, which continue to be impacted by low oil prices. Generally, our economic progress is hindered further by continued austerity and a protracted period of underinvestment in economic infrastructure. Even with the increased investment announced last week, which was welcome, Scotland's capital budget will still have been 8 per cent lower across this decade. What was announced last week was simply a moderation of existing cuts. In contrast, we have prioritised capital investment despite cuts to capital budgets, so major transport projects such as the Queensferry crossing, the M8, M73 and M74 motorway improvements projects, the continuation of the Edinburgh Glasgow rail improvement programme. I will also invest £3 billion to build 50,000 affordable homes over this Parliament. During 2016-17, we will invest £90 million in Scotland's digital infrastructure to help towards our 2017 target to ensure that 95 per cent of premises in Scotland have access to the next generation broadband. All of that investment is aimed at stimulating our economy but also improving our asset base in order to boost long-term productivity. We have made progress in improving productivity performance and narrowing the productivity gap with the UK since 2007, but we know that further improvement is required. Our ambition is for Scotland to rank among the top-performing OECD nations. In conclusion, convener, the vote to leave the EU is an unwelcome barrier in the road towards fulfilling that ambition. That is why the Government's goal of keeping Scotland and, indeed, the whole of the UK is to remain inside the single market. I welcome the opportunity to listen and to work closely with MSPs. I have made that offer before, from across the Parliament, to share that goal. In the coming weeks, we will be able to table specific proposals to protect Scotland's interests and to keep us in the single market, even if the rest of the UK decides to leave. We believe that this outcome is in the best interests of everyone in these islands. I look forward to the committee's recommendations and am happy to take any questions. Thank you, cabinet secretary. You mentioned exports in your statement. Is there anything over and above what has already been publicly announced that the Scottish Government is doing to promote Scottish exports across Europe and beyond? Much of what has been announced will be aware of, but, in addition to that, work goes on all the time. There is a programme of visits from ministers, for example. I recently attended the ADEPEC conference in Abu Dhabi, which is a huge opportunity for Scottish companies to export. I think that what was interesting about that is that there were a large number of companies, as you would expect, that were from the north-east. Some of them told me that they had previously been exclusively focused on the North Sea oil market—that is the market that they had known—but we are now reaching out to try to access different markets around the Middle East. There is that recognition that we have to support that. We had a number of events in Abu Dhabi that helped a lot of the companies that were otherwise quite small to establish that presence. The restrictions will be, of course, the cost of setting up an office, and for many people the 180 days that they are allowed to be there in terms of the visa. A lot of work has gone on in that regard. In addition to that, ministers, when they are going on trips or other reasons, also promote Scotland. The First Minister, as you will know, is in Dublin, and part of what she will be doing is to announce the filling of the extra position to boost the SDI presence in Dublin for the new office that we have there. You will be aware of other ambitions that we have in terms of London and Berlin as well. Just to say, although we have announced the establishment of a trade board, I think that it is worth pointing out today as part of that four-point plan, announced by the First Minister last month that we have begun the process for appointing members of that board, which I will chair, and that board will harness the expertise and experience of members from a wide range of business perspectives that will enable us to focus our efforts more effectively. A great deal of activity is going on throughout the UK as well as throughout the EU and, indeed, in other countries to try and boost trade. A question from Gordon MacDonald. Can I just apologise in advance to the committee and to witnesses that I will have to leave the committee early due to a family commitment? I want to ask a question. We have heard over the last number of weeks about the lack of data relating to exports and have been able to identify what constitutes an export from Scotland. Some of the evidence that we have heard suggested that 50 per cent of our exports are being generated by only 50 companies. I wonder if that was the Scottish Government's understanding. Is there any reason that you will be able to identify why our export base is so low? I think that there has been put on to the internet a pretty good guide as to how those are defined in the different sources for those definitions. We tend to do it on the basis of a survey of companies that are exporting, but there have been questions about the nature of exports to the rest of the UK, to the extent to which they are then exported elsewhere and whether they are properly accounted for in the export figures that we have. As you have said, we have the basic facts of 50 per cent of Scotland's international exports being attributed to a very small number of businesses and 60 per cent of Scotland's international exports also. Rhyb to 60 per cent you are talking about potentially 130 businesses. One of the reasons for the economic and skills review is because we have realised that we have not done what we need to do in terms of exports or internationalisation. There is more being done, and I have just mentioned some of the companies from the north-east in particular that, for the first time, we are starting to look at export markets in a very serious way. That review will specifically give us the focus and try to draw together within the Government the different resources that we have. Ministers going abroad and undertaking these engagements or throughout the rest of the UK, the chamber of commerce has a very active network that we want to tap into. We obviously have a university sector that is very active, including bases abroad in Dubai and Singapore and in places like that. What we are trying to do is to bring those things together so that we can more effectively internationalise our companies. One of the points relates to productivity. If you are exporting into a more competitive and productive market, that tends to be a discipline that is felt back in your organisation. Internationalisation has that benefit as well. The enterprise and skills review is a recognition that we have not done as much and it has been true of previous administrations and their ambitions in terms of expanding the export base of the Scottish economy. We are very seized of that. As to the technical side of it, I would recommend what has been put on the Scottish Government website today in terms of exports, but I do not know whether the chief economist wants to mention something in relation to that. Okay, thanks very much. I think that just to reinforce the point that was made by the cabinet secretary that there is a small number of companies that account for a lot of international exports. That is probably not uncommon in a lot of small economies. The nature of international trade tends to be concentrated in larger international companies and they do that for a number of reasons. One is to capture the benefits internally, the internal knowledge that they generate, and that is something that we have seen in a lot of other places. I think that the challenges that the cabinet secretary has outlined is getting a broader base of the SME base, internationally active, so that, when they grow, they grow in international markets as well. On the international trade statistics, as the cabinet secretary has mentioned, we have put a note on the website that answers some of the questions that have arisen during the inquiry around re-exporting the extent to which our exports capture the final destination of trade and what we do not know in the context of imports from our UK and other trade flows. I am happy to say a little bit more about that in due course, but that information is now available. We had a number of witnesses before us. For instance, the Scottish Air Association David Rowlands has said that obtaining detailed and accurate Scottish export statistics has been a challenge. He talks about flotation devices that manufacture nabardine and are not counted as Scottish exports. If I just directly quote this, it comes from Scotland's Food and Drink Ltd. That is James Withers. He says that I am almost certain that the £1.1 billion of food exports are under-values for precisely the reason that Gilpazans gave in talking about port of departure. I know that the Office of National Statistics is a reserved matter, but I am wondering whether the Scottish Government is putting some resources to delve into those, because it is quite fundamental to the understanding of exactly where our exports go to and what the value of them is, and we are talking in a vacuum, because it looks as if the stats are just not accurate. That is a very good point. It has been made during the course of the enterprise and skills review again across the piece, not just in relation to exports. The quality and extent of the information that we had is not what we wanted to be, so part of that review—we are now in phase two of that review—is to examine what are the nature of the stats, the information that we need, the data that will allow us to get a proper assessment of that. You are right to say not in all cases, but in many cases we are reliant upon the ONS and other figures, and that is not sufficient. I think that if we are to make those changes in terms of internationalisation, exporting and productivity, we have to have the figures that enable us, and they have to be more accurate. For example, the labour market stats that we have are three months out of date and are based on a survey of around 400 people in Scotland. If you compare that with the output from the US economy, where you get very up-to-date and very definitive figures, I think that there is more that we can do in relation to that. In order to do that, we have tasked the Enterprise and Skills Review, the ministerial review group, to look at that specifically. The other point that I would say on exporting in particular, and I would recommend—it is only just gone up, so members would not have had the opportunity to see it, but I would recommend that Q&A, which is now on the Scottish Government's website, there is perhaps sometimes more clarity than we would realise in terms of some of the figures, but you are right to say that other parts of it are partly disguised. It is not possible to be as definitive as we would like as to where exports to the rest of the UK then go on to. There is also what is called the Rotterdam effect, which I am not trying to explain just now, convener, but it can be seen in that question and answer session. I can say that we need to have better data on which to base not just the decisions that we take, but our judgment as to how the economy is performing. Will that be peculiar research in Scotland, or is it based on the ONS research? The Enterprise and Skills Review investigation will be based in Scotland on that review group, which involves people from industry and organisations that are involved in providing enterprise and skills, plus many others. I hesitate to say the word to experts, but I think that that is what they are looking at, the issue of the range of economic data that we have. It will be specifically for the Scottish economy, and I do not think that we should be afraid if, at the end of that, the suggestion is that we should be commissioning extra information, which is very specific and tailored to the Scottish economy, that we should not proceed with that. I think that it is necessary for us to—for example, there is one measure I think called the whole of the economy report, which we do not have in Scotland, which other economies do. We should really have that written branch review of the information that we have, and it should be designed in order to advise the public and inform the public, and obviously parliamentarians as well, but it should be devised in order to make it as easy as possible for us to judge how the economy is doing and to base decisions on as to how we can improve the economy. However, it will be undertaken by that ministerial review group in Scotland. It may, of course—if that is the point of your question—may result in an ask of ONS to say, that this does not suit us, is it possible to do it in this way? Of course, there is obviously a real value in having objective analysis of those figures, but again, I would not want to prejudge what the outcome of that review would be at this stage. I can add to the cabinet secretary's comment. In a sense, we rely on the ONS to produce a lot of data, economic data on a UK basis, with a disaggregated dataset for Scotland. We typically pay for a boost to that sample to allow greater analysis, and that is the example in the labour market and other areas. However, I suppose that the data of interest here is the global connection survey, and that is a Scottish-based survey. It is run by Scottish Government statisticians. It goes out to around 5,500 businesses, which targets the large exporters. However, what crucial it tries to do in captures goods and services being traded from Scotland with the rest of the UK, and it is very difficult to get intra-UK trade. Even at the UK level, it has one source, which is the input-output tables, and that whole trade flow data is really difficult. That is something that we run. The next publication is in January for 2015, and that is the main source of Scottish export destinations. We supplement that both with HMRC data, monthly returns that we get from ONS, and it has done that collaborative basis. However, as the cabinet secretary has alluded to, there are gaps in the data and further work is on-going. Jackie Baillie Can I start by welcoming the cabinet secretary's very clear comments about the importance of the UK market to Scotland? He will forgive me for saying that it stands in contrast to comments made by his colleague Stuart Hosey earlier in the week, so your clarity is absolutely welcome. I know that he shares my understanding that proximity to markets is a key driver in increasing exporting, so, on that basis, can I focus on SDI and their field-ops, because he answered a series of parliamentary questions to me, and I want to tease some of them out? We have 29 offices, as I understand it, across the globe, and only one in our biggest market, which is the rest of the UK. I wonder whether you could explain the strategy that sees one in a market that is £48.5 billion compared to £28 billion in a market that delivers us £26 billion. I think that it would be apparent and obvious to anybody giving that a bit of thought, that the rest of the UK is unlike our other markets in as far as we have huge numbers of connections with the rest of the UK at all sorts of levels in all sorts of different sectors. I do not think that the same imperatives apply. We have those connections, we have representatives in the UK Parliament, we have representatives on UK trade bodies, we have a whole host of connections, so I think that the development of the London office and the further development of the London office has been important to help to boost that, especially at a time of uncertainty in relation to the EU referendum vote, but I think that, just as I have said how valuable the UK market is to us, and we have had some recent successes in relation to that, you can also fairly obviously see the number of other connections that we have across all sorts of different sectors, which is unlike the sectors that the relationships would have with, say, China or India or, indeed, other parts of the EU. I thank the cabinet secretary for that response. I do note that the London hub is being created, so, clearly, he is not dismissing the importance of the UK market. I wonder, though, how many people will be in the London hub, and the reason I ask that is that you are moving staff from London to Dublin, which is pertinent to the First Minister's announcement today. My understanding is that eight and three are being moved across to Dublin, so how many are left in London? It will be sort of just to clarify that in Dublin, as you have said, there is going to be the establishment of that unit, which means that extra staff will be a doubling of the numbers across the EU. As I understand it, and perhaps Mr Burgess could confirm that there will be extra staff also in London, which is designed to—sorry, the extra staff will be in Dublin. Dublin and London together, there is a relationship there. You may be aware of, since the Brexit vote, there was at least a lot of discussion. It is hard to know how much more than that there was about possible fallout from the Brexit vote of companies, potentially moving to Dublin, because it was deemed to be remaining within the EU and English-speaking, which is very attractive to companies. Also, it is true to say that the Republic of Ireland has been extremely successful in attracting businesses to come to it over recent years, and again, it is a vital part of the FMI. Turned today, she is meeting with 100 business leaders. For the exact numbers for SDI, perhaps Mr Burgess or Gary Gillespie could talk about that. Again, I think that the member is right to say that we have recognised the importance. Well, I know that the vast majority of inward investment into the UK comes through London, and very often that will bounce on to Scotland, and we want to encourage that. Conferences such as the Mipham conferences are things that we are showing a presence, along with the seven cities in Scotland, showing a presence that I have gone to visit myself in recent years. We have recognised that by the creation of the London office. Do you want to say anything about the numbers? Yes, just very briefly. In the Dublin hub, which has been established for some time, we already have two members of Scottish Government staff. They are going to be joined by a member of SDI staff. That is an early part of the doubling of SDI's presence in European markets. SDI is quite clear that that is additional resource, that is not simply moving people from one office to another. SDI will be looking at precisely at which people are best in which places, but that is not a diminution of the London presence to create the extra presence in the other markets. I wonder whether you could explain to me the answer to the parliamentary question that I asked. S5W-03970 indicated that, when the London hub opens in 2017, the eight people working for SDI and the three people working for Scottish Enterprise in London will move to Dublin. I am not quite sure that fits in with the answer that you just gave me. I am happy to share the PQ. It is a matter of public record. It is in the name of the cabinet secretary. I think that it does. I think that what we are saying is that additional staff will move to Dublin. At any given time, the last visit that I had to the SDI and Scottish Enterprise is post Brexit in London. I think that there were eight or nine people there. What we are saying is that we intend to further boost that. It is also true to say that, if you visited the office yourself, you will know that it is often the case that the desks that are used there are used by other aspects of the Scottish Government. Intention is to boost the presence that we have in London. It has been successful so far, but we believe that it can be more successful. Do you want to say any more? Sorry to—I think that it is important in terms of the relative priority that the Scottish Government attached to things. For us to understand, are you taking staff away from London to Dublin? Are you replacing them? What will be the complement in London? I think that I can clarify. I suspect that this may be a good old-fashioned typo. The intention is that the staff from SDI and Scottish Enterprise already in London will move into the London hub. I certainly have no knowledge that they are being translated to Dublin, pleasant though that may be. Allow me to investigate that, and we can come back and clarify. I think that that would be helpful. If you wanted to review any other typos that might exist, I am sure that colleague MSPs would be very pleased to see that happen. One final point, because I think that this is important. In relation to SDI's budget, it has been declining year-on-year, so I am keen to know whether the additional staff talked about in Europe from 20 to 40 will all entirely be new and additional staff, in which case SDI will get additional budget for it, or are they expected to cope within their existing financial envelope? I would not be possible, given the activities of SDI, for them to take on that additional number of staff within the same budget. I cannot tell you what the budget for SDI will be now two weeks in advance of the budget itself, but it is not expected that SDI will manage to get by in the budget that they currently have if they double the number of representatives that they have in the EU, so it will be an increase. Dean Lockhart had a follow-up just on this point before we move on to another subject. To our guest for coming along this morning, it is an important relationship between exports and productivity, as the cabinet secretary said. In last week's autumn statement by the chancellor, he made it clear that he wants the UK economy to be match fit, and he announced a number of measures to increase productivity across the UK, as a result of which an extra £800 million of capital spend is coming to Scotland. As I understand it, the Scottish Government's targets for Scotland to reach the first quartile of productivity for 2017 has not been met. Scottish Enterprise has estimated that that has cost the Scottish economy roughly £45 billion in additional GDP. The Scottish Government has control over a number of levers of policy for productivity, enterprise policy, education skills, training and export networks. How does the Scottish Government measure productivity? Secondly, when will new targets be introduced for productivity beyond 2017? I think that implicit within that question is perhaps the first time a recognition from the member that there are two Governments involved in the economy in Scotland. I think that one of the members, former colleagues Gavin Brown, made a statement to the effect that the vast majority of the substantial levers in the economy rested with the UK Government. I think that it is important when we discuss whether it is productivity, export performance or other aspects of the economy. We do at least acknowledge that there are two Governments involved in terms of the economy. On the second question that he asked, I think that I have answered at previous in the chamber to say that, of course, as a result and part of the work of the Enterprise and Skills Review, we intend, as we have said, to have harder alignment across the different agencies that are involved. The other A word would be accountability in relation to that, so we expect to come out of that review with refreshed targets. We still have that overriding ambition to be in the top quartile in terms of the international performance, but refreshed targets and perhaps even more performance measures in relation to how we achieve those targets as to the calculations for productivity, perhaps the chief economist could answer that question. In terms of the target, first of all, there has been a target since 2007 to being the top quartile of the OECD in terms of productivity. That is measured using output per hour of work, and it is calculated on an international basis. Scotland sits behind the UK on that measure in the third quartile, the top of the third quartile, and around, I think, 19 per cent point behind Germany, which is the bottom of the first quartile. That is, in a sense, the scale of the ambition. As you mentioned, there are a number of drivers of productivity, most of which are long-term drivers around education, skills, investment, innovation and the types of things that improve the underlying competitiveness of your economy. In that sense, it is very rare for economies to close the productivity gap very quickly. It tends to take an effort of time over a longer time period. In that sense, that is the sense of the ambition that the Government has set out in the economic strategy. Alongside that, there is a dual mandate to reduce inequality. The recent evidence, certainly from the OECD, World Bank and IMF, is that both are interlinked and that, without addressing some of the social and economic challenges that are facing parts of your economy, you will not reach the same levels of productivity as many of the first quartile countries. Just to add to the point that Mr Lockhart made about the chancellor's statement and investment infrastructure, we think that that is a vital part of improving productivity. Some of the large-scale projects that we have just now are the Queensferry crossing, the M8 bundle, where, to many people, surprise for the first time we will have motorway between Edinburgh and Glasgow, if you like Main Street Scotland and not yet a motorway. It will be after that project complete. Each of those projects has an assessment that I am happy to provide the member with for the extent to which they should boost the productive potential of the economy. We have been doing that for many years. I should say that, in relation to £800 million that the member mentioned, that represents a reduction in the cuts rather than an improvement in Scotland's position over the 10 years from 2010 to 2020. That should be the context in which that is taken. I think that the productivity fund, although that represents a number of different aspects from the chancellor, is a recognition of some of the things that we have been doing in terms of infrastructure over the previous years. The UK Government is now seeking to do that as well, which is welcome. I just wish that we could do more. We certainly have no shortage of projects that we could invest in, but we are able to do more in terms of the capital available to us. Mr Glassby, just to confirm, you did say that the Scottish Government, with new powers coming to Hotherwood, has control over enterprise policy, education skills, training and the export network, most of which are the drivers of productivity. So, while I agree with the cabinet secretary, there are two Governments involved to some extent in the economy when it comes to productivity, most of the levers now lie with the Scottish Government. Would you agree with that? Yes. In the context of the levers that you have outlined, they are essentially all levers that impact on the underlying competitiveness of the economy. Thank you. Richard Leonard has a question for the minister this time. Yes. Resolution 601 committed the Scottish Government to promoting or protecting Scotland's place in the single market and contained an undertaking to report back regularly to parliamentarians and to report to Parliament on progress. I wonder if the minister for UK negotiations on Scotland's place in Europe could take this opportunity to share with us where lies Scotland's place in the single market as he sees it. I'm pleased to do so. There have been regular reports, both to committees, to the chamber, regular debates. This is a live and also fast-moving situation, so convenience of your permission. Very briefly, I'll say where I think we are at present. The Scottish Government will publish, over the next few weeks, a paper that will outline essentially what are the options that exist at this particular moment in time. When I think it's been clear from the debate that's taken place that they lie broadly in three areas, they lie in an undifferentiated option of leaving the European Union in exactly the same way as the United Kingdom intends to leave. That is not entirely clear. I suspect that the clearest definition that we have of it is from the scribbled notes on the front of newspapers today, which I have to say accord pretty closely with the information that I've been able to glean. We don't get told things, as clearly, but the information that I've been able to glean over the last few months pretty much accords with those notes. This is a difficult time in which the options in the UK are narrowing, but they don't seem prepared to say so, but it's fairly clear that we're heading for what might be called a hard Brexit in that undifferentiated option. Clearly, the other end of that spectrum is the possibility that we will not be able to find any other adequate solution but to move forward with an independence referendum and to give the people of Scotland the choice. In the middle, there are a range of differentiated options. The success of those will depend on the willingness of the United Kingdom Government to include those in their negotiating position, because it is quite clearly the United Kingdom Government that will negotiate with the other 27 nations. A lot of our work at present is fleshing out, examining, investigating and building evidence on those differentiated solutions. I'm not going to go into great detail of those at the moment because that's the work that will be on-going for the paper, but the First Minister has indicated areas in which, clearly, there are possibilities. There are, I think, almost 30 sub-state arrangements that the European Union has with a variety of sub-states throughout Europe and elsewhere. Clearly, some of those include, for example, EEA membership, although there's some dispute now as to whether the UK will exit EEA membership automatically or not, EEA membership, after membership, membership of the customs union but not within access to the single market. None of those are as good as remaining within the EU. That's a very important piece of information. We should look at this in a hierarchy. The first part of that hierarchy says, we should stay where we are, because that's the best possible arrangement that we could have. The second part of that hierarchy says, quite clearly, what the UK should do is to remain within the European Economic Area and thus have full access to the single market, although not with the decision-making powers that it presently has. The third part of that hierarchy says, if we cannot do that, Scotland should find a way to remain within that sort of structure in order to move forward. The priority is to remain within the single market for economic reasons but also for many other reasons. Free movement of labour is not simply an economic driver, although it is an economic driver in many key parts of the Scottish economy. Free movement of labour also expresses something about how we see ourselves and how we see our relationships with others and how we want our society to look and to feel. We are working on those differentiated options. If you will bear with us and have the patients to wait a few more weeks, they will be even clearer and we will lay them out in much more detail. Then, of course, the Scottish Parliament will have to look at those very closely, as indeed the people of Scotland will have to look at those very closely and decide what they can have. Is he saying that a Scotland short of independence could still potentially be a member of the European Free Trade Area and, by dent of that, a member of the European Economic Area? I am saying that there are a range of options that we need to consider and some of those will be hard to achieve and some of them will not be hard to achieve, but it is important to look at them all. I am ruling absolutely nothing out. I noticed that the First Minister made that point this morning in something that Guy Verhofstadt had said with regard to citizenship, where he had backed his proposal within parts of Europe, that those people who are no longer EU citizens could pay to remain EU citizens. Now, she said quite clearly that some people will have said to Guy Verhofstadt that it is ridiculous that it cannot be done, but others will have said that that is an interesting idea to look at it. We are in completely uncharted waters and I do not think that there is anything that we should say is impossible to do. There may be some things that have not been done before and need to be debated and discussed. The key to this, however, will lie and it is an important point. The key to this will lie in the willingness of the United Kingdom to fold into their negotiating position, whatever that turns out to be, deals and opportunities that exist for other parts of the UK. The cabinet secretary referred to Northern Ireland. It is absolutely clear that there must be a commitment—indeed, I was at the British Irish Council on Friday in Cardiff. It is made very clear by the Northern Irish as well as by the Tishock that there has to be a deal for Ireland as an island that does not have a hard border and creates circumstances. Just as there will have to be, I suspect that many people realise this, there will have to be a deal for Gibraltar. So, there is still and must be the possibility for special deals for Scotland, except I would not use the term special deal. I might even continue to withdraw it, because what we are asking for is what we have and that is an important way of looking at this. We are asking for the things that we already have and enjoy. That is not a special deal, that is, I think, a right that we should have. He is talking about possibilities. Is there a willingness, at least of spirit, on the part of the UK Government to allow for those options that you are discussing? Leonard, I would never speak for the UK Government, I am certainly not qualified to do so. I would say that I am also an optimist. I would hope that there is that willingness. I have to say that I have had constructive discussions with David Davis. It seems like many of them now. We have met on several occasions. We will continue through the JMCEN mechanism to meet. I think that we will do to meet again within a few days or a few weeks to do that. I hope so. I hope that that would take the Prime Minister at her word when she said that she wanted Scotland to be fully engaged and fully involved. She also said that she would not trigger article 50 until there was a position agreed by the devolved administration. I am accepting the word of the UK Government. I am sure that we should all try and do that. I have a quick question to follow up from Richard Leonard. During our evidence sessions, we have heard from some sectors that most of their members seem to have voted leave and or that they can see positives from what the cabinet secretary termed a hard Brexit. They have expressed their concern that their sector's voice is not being heard and that opportunities will be missed. What reassurances are you able to give to reassure them that their industry needs are not going to be forgotten and that their vote will be as important as perhaps the one that you are listening to? Which sectors are those? Those might I ask so that I am clearer when I am commenting on them. I have in mind the fishing industry. That is one. Which are the ones? It is not really for me to answer the question. It is quite interesting. Let me address fishing as that is the only one that you have been able to mention. I have met the Scottish Fisherman's Federation along with Fergus Ewing. I have made it absolutely clear to them that their view is respected. I have actually asked them, as has Fergus Ewing, to come forward with their views about how they would structure a fisheries management in Scotland after the common fisheries policy. They are engaged in that task. Indeed, yesterday, I met another group of fishermen with my constituency to have that. I am not only showing respect for their view, but I am asking them how they would see this working. I think that that is the right thing to do. If any sector, and I have spoken to many sectors, if any sector says that we think that there are advantages in this situation, then I am very willing to listen to them and understand them. I think that the real question is the balance of advantage. For example, the Scottish Whiskey Association has indicated that they can see the way in which they might operate without a customs union. That is because rules of origin are not particularly important to the Scottish Whiskey Association. There is not much in a bottle of whiskey that has been manufactured outside Scotland or outside the EU, so I can understand that perspective. It does not actually make their life easier one way or the other, whether there is a customs union or not. However, there are other sectors for whom the lack of a customs union would be immensely problematic. We have to balance it between the sectors, and we also have to balance it within the sectors. If we look at fishing, a good example, most of the catching part of the fishing industry believes that the common fisheries policy has not worked well for them. There are many reasons for that. Some blame other fishermen, some blame politicians, but it is clearly our difficulties with it. However, there are other people in the processing sector, for example, who are very nervous about what may lie ahead and who believe that the difficulties in markets will be problematic for them. I am trying to listen constructively to every sector, and I am debating and discussing with every sector, and I am open to that. I am folding that into my thinking as I take forward a negotiating task. I asked the minister on that point of just going back to what we have discussed. I think that he said that in two weeks' time there will be a paper referring to the various options. Not in two weeks' time. At some stage soon? At some stage soon, so I am not trying to tie it down to a timescale. I had thought that you had said two weeks' time. Have you made specific requests to the UK Government regarding aspects of the negotiations? If those have been in writing, do you have those that you could share with the committee, or is it the case that you can't at this stage? There are three things that govern this situation, which I think might be helpful. The first is that the JMC operates under the terms of the memorandum of understanding, which underpins the JMC structure. That requires confidentiality in the process. Although, to the greatest degree, we have tried to make sure that information is always made available from JMCs in the spirit of the Parliament, which is a Parliament based upon openness and transparency. We juggle that, but the MOU and rightly requires, in certain circumstances, confidentiality. The second one is that we are in the process of negotiation, and while I am keen to be as open as I can in this meeting as an example of it, it is difficult to go into the detail of those negotiations. There is detail in all the discussions that are taking place. I think that the general answer that I would give you is that we are not really at that stage. There has only been one meeting of the JMCEN. The second meeting—I think that the Fortnite reference was that the second meeting will take place within the next fortnight. We are planning to meet on a monthly basis, but the ability to do a great deal of detailed work in that time is limited. We are moving towards that, but we are not at that stages yet. Then there is not written detail that you could share with the committee at this stage. I have spent a very long time seeing exactly that. There is not written detail that I could presently share. Jackie Baillie Just quickly, because we are all aware that the First Minister is in Dublin, John Bruton, the former Prime Minister of Ireland and indeed the EU ambassador to the US, said in relation to Scotland seeking a special deal or call it whatever you will about remaining in the EU single market. I think that it is technically administratively and politically impossible. Is he wrong? What option do you believe offers the best alternative to deliver on the Scottish Government's ambitions? John Bruton's point and the difficult other points are that he is dealing with the past view of what the EU does and how it operates, not with the present realities. There has never been withdrawal from the EU, with the exception of Greenland, which is a very different set of circumstances. In all those circumstances, nothing is off the table, and that is absolutely clear, because the table has not been set as yet. The UK has not defined its negotiating position, it will only do so to a greater or lesser extent than the article 50 letter, which may be likely to be at the end of March, so we are not entirely sure. I would say that John Bruton is probably correct in a retrospective look, but not correct in a prospective look, because the type of Europe that we are entering into, the way in which it is organised, the way in which relationships take place, is entirely new and different. There is another agenda going on that is important for us to understand. Brexit is not the only thing that is happening within the European Union. There are many other things happening in terms of the shape and dynamics of the European Union. Therefore, I think that we cannot, with any confidence or certainty, say what is possible or is not possible. I have said in response to Mr Leonard, and I think that it is a point that needs to be made. There are a lot of big difficulties ahead. Nothing that we are talking about here is simple or easy, but I do not think that we should use the term impossible in these circumstances, just as we should not use the term red line or non-negotiable, because I think that everything is in a sense up for grabs. I do not think that it is so much about the UK setting the table, but the reality is that Europe will set the table for us. The difficulty that we have is that the term impossible is not in terms of what we are using, but in terms of what they are using. He is not alone among a number of EU members. I am curious that you cannot be drawn on your negotiating position. I understand that, but I think that there is a danger as we focus on our view and the UK view that we are forgetting the European view. I have great respect for Jackie Baillie. I used to sit in the committee with her. I think that she is raising a very important issue in terms of what the European view is. The European view is hardline and is getting harderline, and that is an attitude towards the UK. They are increasingly fed up with not understanding what is going on and hearing things, which, in the words of the Dutch foreign minister about Boris Johnson, are intellectually incoherent. There is no doubt that that is true. We have to remember the four pillars that Mr Baillie has set himself for the negotiations. The last of which is the exceptionalisms. It is the Northern Ireland, the Gibraltar, which he has named. It is acknowledged that they will require to be special circumstances established or arrangements made. That is not only acknowledged by the UK Government in terms of how it is talking about Northern Ireland, but it is also acknowledged by the commission and the council in the terms of Baillie's four pillars. There is the opportunity to continue to debate and discuss this, and I genuinely do not believe that anything is unlikely or impossible because the European Union has always been flexible, but in these circumstances there are extraordinary circumstances, and we have to continue to talk about them. I will perhaps allow Dean Lockhart to come back in with one last point on this before we move to another subject. Thank you. Just a very brief question for Mr Russell. The Welsh First Minister has also said that he cannot see how there can be separate market access arrangements to the UK between different nations within the UK and that if Scotland had separate market access arrangements to the EU, there would have to be custom borders between Scotland and the rest of the UK. In that scenario, and I very much appreciate that there are a number of different scenarios that may play out, where you had the choice between the UK single market or membership of the EU single market. Which one would you prioritise, Mr Russell? I appreciate that you would probably want the best of both worlds, but if there was a scenario where you had to choose between retaining EU membership or having full access to the single market in the UK, which one would you prioritise? You will imagine that I am not going to be drawn on that situation because I do not believe that that is a real choice. I was with Carwyn Jones on Friday morning. I discussed this issue with him on Friday morning. In every sense, Carwyn Jones understands, as Mark Dickford, his minister who is undertaking his negotiations, understands the complexities, the difficulties, the requirement to have a flexible approach and the ability to say that nothing in this is going to be easy but everything remains on the table. That was his position on Friday morning. It will remain his position now. Actually, we are working very closely with the Welsh Government, the Northern Irish, the Irish and the UK to find a way through those issues. One of the important things is not to be drawn on false choices but to try and make real choices. Mr Lockhart, I think that the minister cannot probably speak for the Welsh administration any more than for the UK administration. I would like to move on to another area at this stage. Ash Denham has a question. I would like to turn to possible effects that we are already seeing on the Scottish economy as a result of the EU referendum in June. Obviously, we have seen a sharp drop in sterling and that has the impact of rising costs for Scottish households. Has the Scottish Government done any modelling so far looking at the impact of, for instance, rising energy costs and food costs on Scottish households? You are right to say that this has occurred to us. I think that there was an estimate of a 5 per cent increase in prices for next year and the impact that might have on interest rates on disposable income, inflation first of all and an inflate interest rates after that. I will ask the chief economist to talk about any particular modelling. We are very aware of that. I have given an example previously in the chamber of just one example, but a company in Ayrshire, which I visited recently, who produced double glazing and patio doors and so on, who said that, at that point, he had not seen a huge impact from the Brexit vote, bearing mind that we do not have Brexit yet, but they had just been told by Irish glass suppliers that there would be a 15 per cent increase in their costs. That is one example, but we have seen that across a number of sectors about cost. On the other side, of course, there are some beneficiaries in the meantime, especially those who benefit from the exchange rate having changed in the way that it has, but I do not know whether the chief economist wants to talk about the modelling that has been undertaken. Okay, thank you very much. In a sense, in terms of the modelling impacts, we expect to see, as illustrated in the budget statement last week, a rise in inflation in the UK over the next year or two, which will obviously impact on household consumption, household affordability. We know from the data the key components of household expenditure budgets by different income groups, and we regularly look at that in terms of the impacts in sectors. It is probably worth just saying a little bit about the context of the depreciation, if I may convener, in the context that the markets have took a view that the UK competitiveness will be impacted by that extent. The movements in sterling reflect the view that the UK competitiveness will be impacted by the EU exit. The depreciation in itself is an adjustment mechanism to a shock, but we have not had the Brexit shock yet, so what that mechanism is dealing with essentially is the uncertainty at the moment. The price effects will take some time to come through, and what we are getting on the upside at the moment is the potential benefits around for certain exporters, also for inward investment and stuff, but the impacts will feed through households, it will feed through to earnings and ultimately to consumption, but the uncertainty around prices really has a big impact on future investment. I suppose that families that are at the lower income levels, if they are spending more money on things that they cannot avoid, such as food and energy prices going up, they are going to have less disposable income to spend in other parts of the economy as well, so you would see a wider impact there. I think that it is similar to the argument for real living wage. If you increase people's income, people on very low incomes, to at least that level, then you have more disposable income in the economy and more is spent, but you are absolutely right in the resolution foundation estimate that low income working families will be £2200 a year worse off as a result of Brexit and the cuts by 2020. That is a huge amount for people on low incomes, and you are right to say as well that of necessity they will end up having to pay first and foremost for necessities rather than any discretionary disposable income being used for other purposes. Mr Glassby, you wanted to come back in on that. Just to say that we track household consumer confidence, we have a survey of 2,000 households in which we run each quarter. We started in Q2 2013, and actually when we ran it in Q3 2016, it was the first time that it had gone negative, and that was essentially households reflecting a view that the outlook was more uncertain in the future for other finances and the wider economy, so that type of uncertainty, if it translates into lower household expenditure, particularly on bigger ticket items, can have a substantial impact on the economy. I simply say, convener, that there is a survey from last week, which I am happy to provide to the committee, about positivity and negativity over the medium and long term from people in Scotland and the rest of the UK. It shows a very considerable worsening in expectation since July, and Scotland is the most negative of all. There has almost been a doubling of pessimistic view, particularly for the longer term. The view for the medium term is declining, but for the longer term it is pretty dramatic. I am happy to make sure that we provide that information so that members have seen it. Ask if the survey was conducted on a Monday. Well, I do not know that, but most people do not like Mondays. I am not going to break into song, but I think that is the case. I think that the survey also looked at people's expectations for where they would be in 10 years time. It was quite different from the more short term one, so it was getting a sense of people's expectations going forward. Essentially, it is in the public domain, so we can provide it. John Mason wants to ask a follow-up question on the impact. It was on the subject of import costs and so on. Has the Government looked at particular sectors that are going to be more adversely affected by the lower pound? Engineering is a particular one that we had along at the committee that expressed a concern, presumably, because it is importing quite a lot. Yes, we have done. Just to finish on the last point, it is also true to say that the Treasury has estimated that a 12 per cent fall in the price of sterling would increase the cost of a typical food and drink shop for a household of two adults and two children by around £120 a year and also £100 increase in clothing and food. We are just to go back to the point that we need. On the sectors, it is true to say that we believe that all sectors will suffer as a result of that. The sterling depreciation provides, of course, for some companies an opportunity and a threat, but for some sectors, with low variable input costs, the depreciation offers that opportunity to sell more products and services to foreign markets. For others, the depreciation will be mainly felt in the example that I gave earlier in terms of increased input prices. That, of course, squeezes margins and will affect profitability, but we do believe that the rise in input costs will affect all sectors. The extent will vary and, of course, we have a dialogue with individual sectors, so whether it was the Scotch whisky through the Scotch whisky association, engineering, you are absolutely right to say that there has been particular concerns expressed there. I think that the other one, which is really pronounced would be in higher education and substantial concerns. As well as all sectors, that means across both manufacturing and services that are provided to be expected to affect every sector, but to a varying degree. Although the pound has fallen already, that is a historical fact. Is it your feeling that, with a lot of companies having hedged a sterling or a currency, that we have not really seen the impact yet? We were getting some indication from witnesses that it might be into 2017, even beyond, before it really hits them, because then they really are going to have to pay the higher prices. You are right to say that it was not an immediate impact for many companies in terms of the Brexit vote that took place. Certainly, on the day that the vote took place, or the day after, I had a number of discussions with senior industry representatives. A number said six months out is when they expected the first real effects to come through. Either William Hill or Gary Gillespie are probably best to answer the question of how it will go in future. If I knew how it would go, then obviously that would be one up on everyone else. It is a very hard thing to predict. As to what the economists say, perhaps Gary would want to add to that. If I can say two points first, in the cabinet secretary's open remarks, he mentioned that the economy through Q2 this year was still dealing with the aftershocks of 2015 oil and gas. One of the things that we got quite a lot back from the company base that year was that the high value of sterling was making it difficult, particularly for the manufacturing and engineering sectors who were selling into the European market. That was a challenge to the high value of sterling, and we have seen it cited in a number of plant closures. The reversal of that provides a bit of margin back to some of those businesses, but contracts are set in different time periods, and the full impact of that will not come in until new contracts for supplies are negotiated. There is that lag effect, as the cabinet secretary has alluded to. The other point that is worth mentioning is that, in a single market, trade is very competitive, and the depreciation from a Scottish perspective may provide opportunities for import substitution. That will not be appropriate for a lot of key sectors, whether they are international components or goods, but if you take food and drink and stuff, what you may see is a supplier change to domestic markets as a way to hedge against the sterling effect. The depreciation, as I said earlier in traditional economic terms, is seen as a channel through which the economy can adjust to a shock. Part of that is to make import costs more expensive and to look to re-balancing within your economy. I think that the question around the future I will not answer to, but that is just some more context. If I could just respond to that, I think that we are going to Labour force next, but we actually had a witness last week who said that, in fact, if they could not bring in Labour force from Eastern Europe, rather than import substitution, it would be increasing imports, because if they could not grow fruit here, they would have to bring the fruit in from overseas. I take the point that Mr Gillespie has made, but it is not just going to be the one way, is it? For example, if you look at some farmed produce, a lot of the inputs to producing those goods comes from feed that is brought in externally, and that presents a different side of the equation. It is not absolutely true of all the different sectors and sometimes true for individual companies that there are pluses and minuses in relation to that. I think that, as I said in my opening statement, it is not unremittingly bad, but there seems to be a real and almost unique consensus among the economies that this is going to have a very detrimental effect and already is having a detrimental effect on the economy. It is also true to say that we have individual companies, and I have said this whenever I have gone round the country, if they see opportunities for, for example, import substitution, we should encourage that to happen. The enterprise and skills review that we are undertaking should be designed to make sure that we maximise that, but on balance, we believe that it to be Brexit, to be an extraordinary act of self-harm to the economy, but that does not absolve us of the responsibility of trying to mitigate its effects and to grow the Scottish economy. Thank you. Julianne Martin. That leads very nicely on to my question, which is about the labour market itself. We have heard from a range of sectors that have got grave concerns about the pool of labour that they have had an opportunity to employ, which has been able to grow their businesses, grow the sector. You will be familiar with some of them, I am sure that you are speaking to all the sectors. We had James Withers from Scottish Food and Drink, who gave one example for us in a very tight labour market area, which is up in Aberlour, where Walker Shop Red was able to grow substantially because of the increased labour market that was there as a result of more migration coming from Eastern European countries. Dean Lockhart has rightly pointed out that the Scottish Government has got certain levers in place to be able to increase our productivity. That is one question of how we are responding to the potential that we might have where we do not have access to that labour, not just to people who might stay here for the future, but also what is our main ask of the UK Government so that we still have access to that labour market? We shall help us to increase Scotland's productivity. That is a question for the Cabinet Secretary on the one hand and a question for the minister on the other. I might also want to respond in terms of poster your workbees in particular, but also the demands of the UK Government. You are absolutely right to say that there is a huge potential impact. If I think in my own area, some of the large major projects that were undertaken just now rely extremely heavily on people from the rest of the EU working on those projects. I think I have said at this committee before that part of my fear is that as we come towards the end of those projects, people tend to be run down, obviously, as they come to completing a project. People take a decision on where they think the next project should be. In some cases, we have at least anecdotal evidence at the same time that we are not sure about the future status of the UK in terms of the EU, so making a decision to go elsewhere. Even more pronounced, I think, you have hinted in terms of the agricultural sector, which is very heavily reliant on EU nationals. I did see one figure that was maybe mentioned in the chamber, and that was London, and I appreciate the difference, where there was a hotel in London that had something like 200 of its 208 staff for EU or non-UK nationals. It shows that in some of those sectors, we are extremely reliant on individuals from out with the UK, and it is a vital part of our productivity. We have had an increase in our productivity not nearly as much as I would like to see around 5 per cent since 2007, but we have had an increase and that has coincided with having a more open economy in terms of attracting people from across the rest of the UK. It is probably true also to say in relation to dentistry and other sectors as well. We have real challenges. It has been a central feature of our representations since the EU referendum, but perhaps in terms of the particular asset of the UK Government, might Brussels be more able to answer that? It has and remains a major topic for discussion. If you look right across the economy this afternoon, we will be debating tourism and the effect on the tourism sector. However, the tech sector and the digital sector, particularly in Edinburgh, are very strongly affected, whereas there is an awful big interchange of younger people. The financial sector, about 20 per cent of its workforce, comes from other parts of the EU. In the health service, 9 per cent of doctors. The one that stops you short, essentially, is in the food and drink sector. 60 per cent of the staff who work in Abattoir has come from the rest of the EU, this may mean compulsory vegetarianism unless we get it right. There is a huge impact and it is right across the board. That is an extraordinary thing. Most people tend to think of this in one sector. The evidence that you had from berry-growing fruit picking is very dramatic, because there is a potential for people to say, if we cannot get the labour, then we will take the bushes elsewhere. We will do things elsewhere, and that is very worrying. I have to say that the issue of migration seems to feature very large in the views of the UK Government and to be a key driver in the Brexit process. Of course, you cannot be within the single market either as a member of the EU or as a member of the EEA unless you accept free movement. If you will not accept free movement, and I see no indication that the UK Government wishes to accept that, then you will not be in either of those economic arrangements. We will continue to press very strongly the need for involvement in the single market, the Welsh use the term full and unfettered involvement in the single markets, many terms you can use, built upon the need for the Scottish economy to have workers coming here at various levels in almost every sector from other parts of the EU. Without that, Scotland would be very severely impacted indeed. That will be a key part of the discussions and is a key part of the discussions, but the present indications from the UK Government are not promising. I would like to pick up on some of what the cabinet secretary said with regard to the skills gap. The situation has probably exposed some of the skills gaps that we have in Scotland. What are we doing to address those with the powers that we have at the moment? First, we have the work that has been done on the new labour market strategy, which has been produced by my colleague Jamie Hepburn. Within that, we also have the related piece of work that we are doing on the enterprise and skills agencies. That is about identifying and seeing how we can quickly scale up on the areas that we understand to be challenges for us just now. The obvious ones to mention are from very particular positions, which have been an issue for some time, such as HGV drivers across the UK, not just in Scotland, but also in terms of digital skills, as well as the issue that we have. If you look at where we have seen the preponderance of people coming from elsewhere to work here, some of the construction trades, we realise that we have particular challenges in there. The work that has been done to date is the production of the new labour market strategy, and that has been further bolstered by the review that we are taking on the enterprise and skills networks. In relation to that, the four different agencies, Scottish Enterprise High, also the Funding Council and Skills Development Scotland. The interaction between Skills Development Scotland and, on the one hand, the Funding Council includes colleges and local authorities. The work that has been done is trying to identify how we can make that more effective, but in terms of trying to boost particular sectors, that is laid out in the labour market strategy that was produced by Jamie Hepburn. Is it fair to say that, in some parts of Scotland, where there is a very tight labour market, we are still going to have an issue? For example, we have picked fish processing, and myself and Liam Kerr went to see Denham's the other week, and they have got 95 per cent of their workforce from Eastern Europe. I will not just agree with that but indicate the problem that exists in substitution. If there is a view that, for whatever reasons, it is difficult to fathom, but for whatever reasons, that positive input of labour should not be allowed to continue, the question is how you substitute it. There simply aren't enough people in Scotland to do that, and although there are undoubtedly skills gaps, and I won't interfere in that area of policy, but as education secretary for five years, I was very aware of that, are there other places where you will find those workers and they will come here? If you look at the experience that the Prime Minister had in India just a few weeks ago, it is absolutely obvious that the Indian Government continues to press for greater migration into this country, particularly on the skilled sector. A lot of very skilled young graduates, and this was refused. Essentially, the failure of the Prime Minister's visit to India was built around that. There was no give that she described the present migration system as highly satisfactory. In all those circumstances, there is no substitution. Therefore, there will be, if those workers are not here and cannot come here because it is not static, there is an absolute need to guarantee the rights and residents of 191,000 who are here, but that is not a static situation. People come and go. If it becomes that much harder to come here, then it simply will not happen. I have heard it argued that what will happen is that there will be a different migration system that will be sexually based. Many of us MSPs have experience of dealing with the UK Borders Agency and the Home Office on issues of migration. If you would have a sexually based system that was, for example, in an area of work that is dependent on seasonal, for example, and berry picking, the berries would have rotted on the bush by the time that that had actually come into effect. Therefore, there is a very serious problem that is emerging for the economy, and there are no answers to it as yet. I am not suggesting that I have all the answers, but a number of witnesses in front of this committee have suggested that we have an opportunity now to reinvigorate our domestic workforce. We have youth unemployment in Scotland at 12 per cent. There are some 70,000 young people in Scotland between the age of 16 and 24, not in employment, education or training, and the Fraser of Allander highlighted an increasing level of inactivity in the workforce by 54,000 this year. Would there not be policy measures in place where we could retrain and bring those people into the workplace to potentially replace a limited free movement of nationals coming from the EU, if that indeed does transpire? I am not suggesting that overnight we can make those 70,000 job ready, but surely we should start now and should have already had policies in place to bring those 70,000 people into the marketplace. I have no expert in theory. That would be a matter for the cabinet secretary and for his team, but I have to say that I think that it is highly, highly unlikely that you will substitute in the numbers or the skills required in order to do that in anything like a reasonable period of time. Given what we have seen today in terms of the indication that there is not to be any transition in case people thought that they were not leaving, then I think that the problem being created, and it is being created for Scotland, Scotland did not vote for this, the problem being created is enormous and likely to be incredibly damaging if the present trajectory is followed. Can I say that I do substantially agree that we should be looking to reskill those people? I think that it is worth, again, putting it in its correct context. If you have, as we have, I think that 40,000 more people employed at above the pre-recession peak that we had before and 166,000 more above the recession trough, as I mentioned in the opening statement, then if you are at a position of 4.7 per cent across Scotland of unemployment, then you can imagine within that you have variations, so potentially substantially above that in some localities and well below that in other localities, and that may be, to some extent, coincident with some of the areas that Jolly Martin raised as well. You could have an employment potentially between one and two per cent in some of those areas, and the question is where you draw in that additional labour. That does not mean to say, of course, that we should not try to make sure, as we are trying to do through the labour market strategy and the skills review, that we have a better fit and also we ensure that industry is much more involved in how we actually deliver the skills that are required in the future. As against that, just to say that the dampening of employment prospects, which has been cited by virtually every economic expert there is, is a bigger issue in terms of that. The effect on the economy of Brexit is going to be a substantial risk. It does not mean to say that we should not do, as you have suggested, and make sure that we have people ready for the jobs market. There is no question that we have to do more in relation to that, but I think that the bigger issue really is the general impact on the economy. I do not know whether convener Gary Gillespie wants to come in on that point. I was just to add a couple of thoughts to the comments. In the sense that I think back to the previous one, the labour market is really dynamic. We have flows in and out both in terms of people moving from employment to inactivity. Not all inactivity is necessarily bad. Some of it is to do with further higher education or for family or personal reasons, looking after family or children. There are dynamic flows all the time. People enter, people leave and also the dynamic with our UK and EU migrants. In the sense that the economy devolves skills, demands and change over time as well. In the context of the youth unemployment and the rate of unemployment at the moment, it is interesting just to reflect. Pre-recession, pre-financial crisis, we had a record low on unemployment, which I think was around 4.6 per cent. At that time, our youth unemployment rate was 12 per cent, and that higher rate reflected the structural issues around new entrants to the labour market of their particular age, circumstances and that transition path. There is a lot of work being done to make that a smoother transition for that group, following a series of reviews. However, the key thing is that the labour market and the point around how we reduce the structural rate of unemployment gets back to the economic strategy and the focus on competitiveness and reducing inequality and reaching out to those furthest from the labour market. In a sense, that is how we bring those people into employment and that is how we boost the long-term capacity of the economy by having more people engaged. The point that has been made was, can you have direct substitution in a dynamic market? Probably not, and probably for the reasons of location skills specific. This is an on-going process, but the key point is that the labour market is dynamic. It is only two or three years ago when we were facing different skill shortages, such as oil and gas engineering. Those skills shortages evolve all the time. Skills Development Scotland track them, speak to employers and shift the resources to meet those demands. There is a degree of consensus here. Some witnesses have suggested, even with further flexibility in the labour market, to encourage what they have referred to as internal migration, to deal with the different regional patterns of economic supply and demand. Perhaps that is an area that I would suggest that the Government could look further into in terms of the patterns of internal migration, if there is indeed to be a limit to EU nationals coming into Scotland. I will move on to Andy Wightman now, who has a question. Thank you, convener. Welcome, Mr Cabinet Secretary. My question is about inward investment. We heard evidence from the chief economist of RBS, Stephen Boyle, who said that, if we have a fixed pot of money for the purposes of promoting internationalisation, that money will likely be more productively spent on export promotion than on the attraction of foreign direct investment. Yet, Professor Jeremy Pete also said that a lot of high productivity, high-skill, export-oriented businesses are based on inward investment, as much as domestic investment. What work has the Government undertaken to adapt its strategy around inward investment to reflect both the uncertainty but also the possibilities of improving exports by increasing inward investment? The two witnesses have cited that both of those things are important. Inward investment often can also bring with it new skills and new productivity gains into the market as well, into the domestic economy, which is extremely important. We cannot get complacent about the fact that it often brings well-paying jobs with it, which is vitally important to people, so I think that we want to continue to do that. In addition to what we are currently doing, we recognise that there is an interdependence and there are complementary assets that are shared between, for example, Scotland and London in key sectors such as financial services and technology. London, as I mentioned in response to previous questions, is very important to us. The vast majority of inward investment in the UK comes into London. It often goes out of the UK altogether for the actual investment, but we also tap into a substantial degree. What we are trying to do is to present a more effective team Scotland approach. We have worked with the seven cities that have their own pitchbook of investments. Those are ones that are driven by the cities themselves for what they want to see being invested in. Of course, I have already mentioned the doubling of the number of SDI staff across the EU. We have seen, for example, the number of offices that we have in India grow from one to three. We recognise, in terms of India and China, that we are starting from a very low base, but we are building up those relationships. It tends to be the case, certainly in China and in my limited experience in the Middle East, that these things do depend on building up relationships over a period of time. In terms of exporting, we are, if you like, increasing our activity but also trying to increase its focus so that we do not have people representing Scotland or parts of Scotland's pitch for investment. If you like tripping over each other, we do it in a more co-ordinated way. In relation to inward investment, we do not intend to take a backward step from the position that SINA has achieved in the last three second highest per capita investment from elsewhere in the UK, second only after the south-eastern London and then just London. That has been extremely successful, according to the Ernst and Young studies. We recognise, as has been mentioned a number of times, the challenging nature of the economic environment that we are going into. In that context, increasing our inward investment is going to be extremely important, as is exporting more of what we produce, so I think that there are efforts in both those areas. Just to follow up on the inward investment aspect of that, to what extent are you aware of companies or investors interested in investing in Scotland whose investment is conditional on the membership of the single market? Is that an issue that you are having to deal with? To be honest, it is very hard to say, because somebody who sat and made a decision not to invest in Scotland or the UK because of what they perceived to be uncertainty about the membership of the single market are not necessarily people who will tell you about that. Anecdotally, and I would be interested to see the experience of others, I went to one company on the outskirts of Edinburgh recently who themselves are involved in 33 different countries. This was actually three or four months ago, to be honest, but after the vote and they said they were aware of an investment decision which was going instead of, in that case, Scarborough going to Frankfurt instead because of the Brexit vote. Didn't say it was a huge investment, but they had seen that. So I think it's hard to quantify, it tends to be anecdotal evidence, since perhaps not fair to offer that up as a position, but it will be in the nature of those decisions that you'll often not get to hear about what you've not managed to achieve, because companies will have just made the decision to go elsewhere. There are other anecdotal evidence that I can get, but I don't know whether Gary has more sister or Mike has more sister. For example, Mike Russell and I met jointly with the major Japanese companies that are involved in Scotland, some very substantial companies and some of which have a number of different divisions active in Scotland, very large employers in many cases, very happy with being in Scotland by expressing, I think it's fair to say, not a threat but one or two saying that without the EU, without current arrangements, they would put a big question mark over their contained involvement in Scotland. This is not a static situation in that regard. There are people who, you know, the Hitachi report earlier this month showed that there was something like 6.5 billion of investment in the economy that was being withheld presently because of uncertainty, but there are also existing companies who will either hold back on that investment, some of that sort in that figure, or who will begin to ask whether it does give them the access to the single market, for example, that they required when they were established. So the climate is changing and the possibilities are changing for those who are investing in that climate. It is worth reading the Japanese letter, letter from the Japanese Government on the issue of Brexit, which was issued in August early September, which I think remains one of the key documents in this area, which looks at what is required for companies to continue to have confidence. One of those two most important things is transition, which the UK Government appears to be setting its face against, and transparency, so that people know what situation they are in. I think that whatever else you could say about the present situation is not very transparent. If I may just add two very quick points on that subject. In a sense, for companies looking at the UK or Scotland as a source of investment, there are two basic types. One, the first is the sense that the market access is key around the four freedoms, looking to come into the UK or Scotland to service that market. The other one that is probably more important is the on-going investment, the stock of EU and UK and foreign-owned businesses that are in Scotland at the moment. An on-going investment tends to go under the radar. Since that is potentially more of a threat if companies are thinking around their future different scenarios about where they could operate, I think that one of the earlier questions asked around the concentration of exports by a small number of sectors, companies tend to be much more global now, much more integrated in their supply chains, will have opportunities and networks in different outlets, and that is the risk, I think, around potentially losing capacity down the line. In relation to that company that I mentioned in the west of Edinburgh, I asked about the impact of, at that time, the vote on Brexit had been about two months old, and they said that, given the fact that they are active in 33 different countries around the world, the most difficult thing that they had to deal with was trying to explain to their counterparts those 33 countries why they were asked why the UK voted for it and they could not give, in their view, an export-driven international company an explanation as to why the UK had done that. Jackie Baillie A very, very tiny question, but one of substance, I think. The Scottish Government has its own economic strategy published some time ago, a trade and investment strategy published in early 2016. In light of Brexit, are you not reviewing them both to ensure that we are properly focused on what we need to do? I think that, in terms of the economic strategy, it was interesting that, in the course of the review into the enterprise and the skills agencies that we had recently, which reported on phase 1, there was a lot of potential for discussion around that, and a lot of the feedback—I think that there were 300-plus responses—did not seek to question the current economic strategy that we have. They actually supported the economic strategy about inclusive and sustainable economic growth. You mentioned that we have changed our trade strategy. I have mentioned a number of different elements of that, the four-point plan that the First Minister laid out, including increasing our representation, including the number of people that are involved in promoting that strategy, making sure that there is a sharper focus among all ministers in terms of promoting that. I think that we have reflected the change circumstances given the kind of continuing uncertainty as to what the outcome of those discussions will be. It will be, as Mike Russell laid out, that we have to keep an eye on that and adapt as we go along. However, I think that the changes that we have made in terms of the gross scheme that we have been developing just now, in terms of the enterprise and skills review, in terms of beefing up the trade side of what we are doing just now, and in terms of attracting our investment, I think that we have responded to that situation. However, no, we have not changed the economic strategy. I am curious, convener, just on a very small point, because Professor Graham Roy and a former employment had a direct hand in shaping that strategy. It is his view that, in light of the severity of the pose by Brexit, the strategy should be reviewed and should reflect that. I wonder whether you would take that away and consider that. Certainly, as I have said already, we all know that we are in a rapidly changing situation where the outcomes are uncertain and you always want to have a view, or to take a view on those. However, I think that the changes that we have made in terms of investment and trade perhaps reflect a different emphasis underneath that strategy. However, of course, I always want to look at those things as circumstances develop. Thank you. Richard Leonard. You mentioned that you were on the remarks, cabinet secretary, about your last appearance here on 28 June. You said on that occasion of the manufacturing action plan that you would and I have got it in the quotation marks here. I would like it to be extended further to turn it into the kind of industrial policy that used to be fashionable. There are certain things that I will be able to make public shortly that will demonstrate that we are taking a more holistic approach. I wonder if, five months in a day on, you could elaborate on that. Yes. To give one example of what was meant then, what has now become public that was not of that time, is the work that has been done largely by my colleague, Fergus Ewing, for example, in relation to the Rio Tinto Alcan developments, which have now been announced the safeguarding of, I think, from memory 150 jobs but with the potential for many more. I mentioned that because that shows the links that there are between the work that is being done there and proposed to be done there with other parts of industry, which can support industry. For example, it may be the case with the move from steel to aluminium and cars that what you will see instead of steel being moved around to different places between car production plants and steel production plants, you may be able to have a domestic source for the raw materials for car production. I do know that much of the work in relation to that and it is also true in a number of other areas that we are looking at just now, you are seeing people thinking about the whole industrial strategy, not just one production facility but how you can actually produce the raw materials for that as well. That is the kind of thing that I had in mind in relation to that. Of course, we have produced a strategy and we are looking to establish the manufacturing centre of excellence. There are other areas that, if we are successful in achieving that, you will see the linkage that I mentioned. I think that what is interesting since the last time that we discussed it is that the UK Government announced something very similar. We have not seen a huge degree of evidence, but certainly in the discussions that I have had with UK ministers, they are talking about, Liam Fox was the last one, I think, the UK Government wanting to develop an industrial strategy. Just to come back to a previous point that was made by Dean Lockhart in relation to that, we may have some of those tools, but exports were mentioned. Export guarantees for overseas companies are provided by the UK Government. It is a mixed picture in relation to that. What I am keen to do genuinely with the UK Government that has made that offer is that, if we can work together in relation to that, I could just mention some of the sectors where there are some of the discussions on going shipbuilding being one of them, that we can actually start to see, instead of one plant producing something, you can see a whole supply chain moving into a customer base, which is sustainable in the longer term. Those are some of the things that we are trying to do in order to make sure that we have a coherent industrial strategy. Do you plan to publish a paper? Well, of course, we can do that. I think that what we are doing just now is working on the immediate challenges that we face, but I think that that will be related to the establishment of the manufacturing centre of excellence in due course. Thank you, cabinet secretary. You mentioned Dean Lockhart, so I will let him come back in with a very minor point, I think, just as we draw to close here. Thank you, convener. It is in response to a parliamentary response that Mr Swinney made last week when he announced that the individual boards of the enterprise agencies and the other agencies would be replaced by the Board of Trade. Cabinet secretary, can you tell me or tell us when this will take place and how will you ensure that the Board of Trade will have an understanding of the very different remits carried on by those individual agencies? I think that perhaps there is some confusion about the Board of Trade and the Strategic Board, which is to be established as a result of the enterprise and skills review, if I am reading the member's question correctly. The Board of Trade is quite separate from that, which is, as I say, we have agreed or in the process of agreeing the membership of that just now. The strategic board, which would be the replacement for the boards that the member mentions. First of all, to say that the enterprise and skills review you are asking at the timescale when this will happen. The phase 2 of that will take us through until March next year, that is the current estimate for that. One of the first tasks that it met last week that it has been given is to look at the governance arrangements for the different agencies. Just to be very clear that high hands and hands enterprise will remain as an agency, a statutory agency, as will the other agencies. The question of their governance, the question to which they relate to their local areas and how they relate to the strategic board, which I think is necessary for the hard alignment that I mentioned before, is one that has been discussed by them currently. As I say, if it is a timescale that has been looked at, we expect that to come back over the course of the next six months. It is not the case, we have to wait until that is done. Some things can be announced during that process, but that is the kind of timescale that we are working towards. Andy Wightman's indication is a very, very small point to make on this, and this will be the last question today, Andy Wightman. Cabinet Secretary, I wonder if, to help clarify this, you might indicate whether it is your view that Highlands and Islands Enterprise, after the review is completed and after the change that has been implemented, will continue to have its own legal personality? The agency will remain in law. It is established, I think, by primary legislation, but it is established in law, so that is not intended to change. Thank you very much to the cabinet secretary, the minister and the officials for attending today. We'll move on into private session, I thank you very much.