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Stephen Boyle: Reflections on the Budget, the Scottish Budget: Budgets are a sideshow, so how can we grow faster? (16.04.13)


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Stephen Boyle, RBS Head of Group Economics, is a highly respected economist and uniquely placed to share the main issues and challenges facing Scotland in light of the 2013 Budget announcements.

Stephen Boyle is Head of Group Economics at the Royal Bank of Scotland (RBS) Group and a director of RBS Pension Trustees Ltd, the Group's main pension scheme. Stephen first worked at RBS from 1996-2001 as Head of Business Economics. He returned to RBS in 2006, having established Futureskills Scotland. He has worked in universities and was director of an economic consulting business. Stephen is a Trustee of the David Hume Institute.

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Stephen Boyle: Reflections on the Budget, the Scottish Budget: Budgets are a sideshow, so how can we grow faster? (16.04.13)

  1. 1. Budgets are a sideshow, so howcan we grow faster?Stephen Boyle16 April 2013
  2. 2. 2Starting point: the worst growth performance in 180 yearsGDP from pre-recession output peakPeak = 10090951001051100 4 8 12 16 20Quarters since peakScotland - current cycle Average post-1955 UK cycle Great Depression UK - current cycleSources: Office for National Statistics, Bank of England
  3. 3. 3The UK government’s economic strategy1. Fiscal austerity2. Active monetary policy3. Supply side reform
  4. 4. 4The constraint:debt is very high compared with recent decades, and still risingPublic sector net debt as a % of GDP01020304050607080901980 1985 1990 1995 2000 2005 2010 2015Source: Datastream
  5. 5. 5Big steps and baby stepsWe are still in the foothills of fiscal austerityProportion of total reduction in deficit* occuring in each year0%20%40%60%80%100%2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17* Cyclically-adjusted surplus on current budgetSources: OBR, Datastream
  6. 6. 6The UK can still borrow at historically low ratesWill that persist? Should the government borrow more?Rate of interest the UK government pays to borrow for 10 years, %0123456Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13Source: Bank of England
  7. 7. 7(How) can we achieve ‘escape velocity’?My approach Scotland & UK are already rich & successful countries In Scotland’s case, look for options within the existing constitutional settlement– No fiscal slack – ‘one-in, one-out’ approach to spending– Take the welfare system as given Try to use the available evidence– Where are we strong or weak?– What works best? Focus only on ‘growth’ and ignore the inevitable trade-offs– e.g. some environmental impacts What makes economies grow?– More people (and other inputs)– Higher productivity So, critical question: what will most effectively boost productivity? Humility
  8. 8. 8Competition is the most effective means of delivering ‘good’ outcomesWhat can we do in to boost competition? A more highly skilled workforce Better management More active owners More innovation Lower prices
  9. 9. 9Scotland’s workforce is one of our strengths, more so than the UKWe are well-qualified, perhaps over-qualifiedQualifications of working age people, 20110%10%20%30%40%Level 4+ Level 3, inclapprenticeshipLevel 2 Level 1 No qualificationsScotland UKSource: NOMIS
  10. 10. 10Stylised evidence on the rate of return to ‘education’ at different agesSource: James Heckman
  11. 11. 11Roads generate roughly twice the ‘return’ of local public transport & railBenefit to cost ratios of transport investments02468101214Rail Local roads Local publictransportHighwaysSource: Eddington Review
  12. 12. 12Smaller projects generally offer better ‘returns’ than larger ones
  13. 13. 13Scotland’s overseas exports weathered the recession reasonably wellBut they have been becalmed in the recovery as world trade acceleratedEstimated exports in constant prices, 2011 = 1007080901001102002 2003 2004 2005 2006 2007 2008 2009 2010 2011UK total exports Scotland - total exports Scotland - excluding electronicsSource: Scottish Government, RBS Group Economics estimates
  14. 14. 14Pre-crisis, small firms were an engine of export growthPost-crisis, small firms have struggled – why?Change in overseas exports by company size, £m-1,000-50005001,0001,5002,0002,5003,0002002-08 2008-11Large (250+) Medium (50-249) Small (<50)Source: Scottish Government
  15. 15. 15‘Planning’ makes office costs more expensive than they need beThat is a choice ‘Planning’ more than doublesoffice costs in Glasgow &Edinburgh i.e. the price of occupyingproperty is 200%+ more thanthe cost of constructionRegulatory tax rate on commercial propertyDifference between construction cost & price paid, 1999-200502468London-WestEndCityofLondonFrankfurtStockholmCanaryWharfMilanParis-cityEdinburghMaidenheadBarcelonaBirminghamManchesterLondon-HammersmithGlasgowReadingAmsterdamLeedsParis-LaDefenseBristolNewcastle-upon-TyneCroydonBrusselsManhattanin2000Source: Paul Cheshire
  16. 16. 16‘Planning’ means fewer, more expensive houses In England, ‘planning’ restrictionsincrease house prices and, hence,living costs Relaxing planning constraints wouldreduce real house prices in Englandby 35% & boost the size of thehousing stock by up to 17%Source: Christian A. L. Hilber and Wouter Vermeulen
  17. 17. 17Unintended consequences of ‘planning’ on retailing, the price of shopping &High Streets Again, in England, ‘planning’restrictions reducedproductivity in retailing,pushing up prices for shoppers Planning policies that put towncentres first mean prices arehigher for shoppers and thatchains can push out ‘local’retailersProductivity of retail outlets by year of openingSource: Paul Cheshire, Christian A. L. Hilber and Ioannis Kaplanis
  18. 18. 18And less of …
  19. 19. 19And less of …1990sIn 1993 Scotland Enterprise – thegovernment’s economic developmentagency for lowland Scotland— launchedthe Business Birthrate Strategy. It set anambitious target to close the gap in thebusiness birth rate between Scotland andthe rest of the UK by the year 2000.2013Scotland’s relatively smaller businessbase, low business start-up rate andlower levels of business expenditure onresearch and development, have beenidentified as key challenges facing theScottish economy.
  20. 20. 20A word from our lawyersThis material is published by The Royal Bank of Scotland plc (“RBS”) which is authorised and regulated by theFinancial Services Authority for the conduct of regulated activities in the UK. It has been prepared for informationpurposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments,other financial instruments or related derivatives (“Securities”). It should not be reproduced or disclosed to any otherperson, without our prior consent.This material is not intended for distribution in any jurisdiction in which its distribution would be prohibited.Whilst this information is believed to be reliable, it has not been independently verified by RBS and RBS makes norepresentation, express or implied, nor does it accept any responsibility or liability of any kind, with regard to theaccuracy or completeness of this information. Unless otherwise stated, any views, opinions, forecasts, valuations, orestimates contained in this material are those solely of the RBS Group’s Group Economics Department, as of thedate of publication of this material and are subject to change without notice. Recipients of this material should maketheir own independent evaluation of this information and make such other investigations as they consider necessary(including obtaining independent financial advice), before acting in reliance on this information.This material should not be regarded as providing any specific advice. RBS accepts no obligation to provide anyadvice or recommendations in respect of the information contained in this material and accepts no fiduciary duties tothe recipient in relation to this information.