Marine-Technology-with-Marine-Eng-BEng-H504-cropIn the latest of our big-picture pieces on priorities for the incoming Scottish government, Iain Docherty explores what we can do with the economic powers we have – building “strategic capacity” as a preparation for independence

This month could have seen the first government of a newly independent Scotland take office, equipped with the widest possible array of policy tools to help make the country fairer, greener and wealthier.

But since Nicola Sturgeon’s incoming administration is not in such a fortunate position, what should it do with the powers it does have to stimulate the economy now, and also develop the kind of approach to economic governance that an independent state will need in future, if it is to prosper?

One of the biggest fallacies about the outcome of the Smith Commission is crystallised in David Cameron’s assertion that Scotland is now one of the most powerful devolved jurisdictions in the world.

Although it is true that the Income Tax provisions of the 2016 Scotland Act give the Scottish Government responsibility for raising a larger proportion of its revenue than most other non-sovereign states, the actual level of extra policy autonomy afforded by the 2016 Act is minimal.

A very small number of additional taxes have actually been devolved. This means that the Scottish Government has no power, for example, to reshape Capital Gains Tax (the revenue from which remains reserved to Westminster) to avoid leakage from Income Tax. Nor can they alter R&D Tax Credits to support our most important innovation clusters.

All of this means that, given the imperative to get on and do the best we can with what we have, the Scottish Government must be as creative as possible with the ‘soft’ measures at its disposal. They must use them to push the economy in the direction of the higher value and better productivity required, if we are to close the prosperity and wellbeing gap with our Nordic cousins.

This will require taking some risks. Scotland needs to have the kind of entrepreneurial ‘smart state’ recognised as being behind the recent success of the Danish wind power sector. A smart state also needs to be prepared to channel the limited available resources into promising and potentially high-return industries such as marine renewables.

This is an infant sector in danger of being strangled at birth – not just by vested established energy interests, but also by a UK government machine more focused on other ‘priority’ sectors (such as automotive technology) in the south east of England.

Give our highly skilled and specialist public sector bodies more power, support and recognition for their contribution. Not only will the economy do better, but we’ll also have the strongest possible base from which to grasp the opportunities of independence when it finally arrives.

We also need to keep investing as much as we can in the skills of our people and the capital stock of the economy, in the form of better infrastructure, more housing and so on. These both support jobs in the real economy now, but also improve the potential for future growth.

The new government must also explore some inconvenient truths about the state of the Scottish economy and the challenges it faces. Prime amongst these is the over-reliance on financial services as a source of jobs, revenue and growth.

We know that too much dependence on financial services crowds out innovation in more productive and socially useful sectors, particularly in manufacturing and knowledge intensive service industries. Countries whose numerate and skilled workforces are more likely to work in the science lab, rather than the trading room, have more resilient, diversified and wealthier economies.

Germany, the Nordic countries, South Korea and even to a surprising extent the US, generate more sustainable and stable patterns of economic development through precisely this approach. In contrast, Scotland is at risk of smothering its manufacturing and higher tech services sectors outside financial services. Innovative small firms – the very business actors that are at the heart of successful diversification and new product development – are being particularly hard hit.

There may not be much money available and little scope to alter the tax system in the short term in order to address these issues. But at least the conversation has to begin about what we might do to make our economy more resilient in the long run.

Then there is the need to do more of what we know already works. Scotland’s strong relative economic performance vis a vis other parts of the UK since devolution is based on how it has been able to better deploy and leverage the existing powers and resources it has at its disposal.

One of the most important reasons for this – contrary to the usual sniping from the right wing press – is that Scotland is, in fact, rather well governed.

In particular, we have assembled a range of specialist government agencies and quangos, such as Scottish Enterprise, Skills Development Scotland, the Scottish Environment Protection Agency and Transport Scotland, that are really rather good at what they do.

If you still doubt this, go and ask any informed observer about the chaos lurking beneath the surface of the so-called ‘Powerhouse’ of the North of England, as they struggle to put together the necessary skills and organisational nous to deliver on their objectives.

We need more of this specialised, confident government – “strategic capacity“, in the jargon. And although formal control over the civil service is another power yet to be devolved, there is much that can be done in the meantime to increase the relative power and influence of these European-style specialist bodies. Particularly compared to the traditional core civil service – in which the person leading schools reform this year was in charge of fisheries last year, and worked in prisons the year before that.

Give our highly skilled and specialist public sector bodies more power, support and recognition for their contribution. Not only will the economy do better, but we’ll also have the strongest possible base from which to grasp the opportunities of independence when it finally arrives.

Iain Docherty is Professor of Public Policy and Governance at the Adam Smith Business School, University of Glasgow