Report - Section 5

The first priority, however, would be to spend the surpluses as far as possible in developing Scotland's domestic economy and providing a modern infrastructure. The following paragraphs suggest how this might be done.

1. Manufacturing Industry

   Output per head in most sectors of Scottish industry is well below European levels. This is largely because the British economy has invested much less than other European countries over the last 25 years. A substantial increase in manufacturing investment is therefore necessary if this is to be put right. Only then will Scottish industry be able to compete effectively with other members of EEC at anything other than low exchange rates.

   Part of the reason for the low investment in Scotland in the past has been the persistence of 'stop-go' in the UK economy. Every time investment has begun to rise satisfactorily, as it was doing in 1973, the emergence of a balance of payments deficit has forced the Government to take strong deflationary measures with the result that the investment boom has petered out again. Scotland made good progress in 1973, but ideally from her point of view the 5 per cent growth rate needed to go on for another couple of years. As an independent state, Scotland's balance of payments position would enable her to break out of the 'stop-go' cycle and a sustained rate of growth could be planned on the basis that it could be carried on for at least a decade. The strength of the currency coupled with the budgetary surplus would help to keep interest rates down and there would be no need for sudden increases in taxation or massive cuts in public expenditure. Admittedly, since Scotland is so closely tied to the English market, her economy would continue to be affected by measures taken in London, but this effect would diminish the more Scotland expands trade with other EEC countries. Furthermore, it would be quite proper for a Scottish Government to take countervailing measures to stimulate the Scottish economy at times when England was going through a recession. Such measures would help to keep Scottish output up and would help the English economy by reducing the Scottish balance of payments surplus. It can be expected therefore that the prospect of sustained expansion and an end to 'stop-go' would do more than anything else could both to raise investment in domestic industry and to encourage foreign investment to come to Scotland.

   However, this expansionary macro-economic policy would need to be backed up by firm regional policy measures. The position in West Central Scotland has deteriorated vis-à-vis the rest of Scotland over the last decade and this is likely to be even more accentuated by North Sea oil developments. Furthermovisre, as an independent state, it would seem to be quite inappropriate for Scotland to regard the whole of the territory as subject for regional policy. Something along the lines of the following package of measures therefore seems to be most appropriate:-

   1. For Scotland as a whole the Regional Development Grant would be abolished, but to stimulate investment Corporation Tax would either be abolished or reduced to a purely nominal rate. This would have the effect of more or less removing the tax from industry's retained profits while leaving distributed profits taxed roughly as they are at present. As a national fiscal policy measure it would not come within the control of the EEC's ceilings on regional aids. The cost of abolishing Corporation Tax would be £120m.
   2. West Central Scotland would be scheduled as Scotland's Development Area and the definition could be extended to certain smaller areas in the Highlands and Islands if necessary. Within this area there would be a 20 per cent Regional Development Grant paid as at present in addition to (i) above.
   3. There would be a Scottish Development Authority covering the whole of Scotland but with instructions to give particular priority to West Central Scotland. Its budget would at least be on a scale equivalent to the funds which previously went into REP and SIDO. It would be empowered to give discretionary grants and loans and would be equipped to provide advice to companies. It would be responsible for working out a strategy for developing Scotland's domestic industry as well as promoting foreign investment. The HIDB would continue to operate with its own much wider remit in the Highlands.
   4. Steps would be taken to strengthen the shipbuilding industry by adopting a scheme for insurance against inflationary risk as operated in France and approved by EEC. The new SDA would be especially charged with the preparation of proposals for the modernisation of the industry.