Key to sustainable recovery will be attracting investment - Sandy Begbie
While the coronavirus pandemic is not yet over, the continued success of the vaccine program and the roadmap out of lockdown means the end is in sight.
However, as our political leaders have often reminded us, and the roadmap outlines, Covid restrictions will end in a gradual manner rather than a ‘big bang’ moment.
Furthermore, as the health emergency subsides, the economic emergency will come into even sharper focus. According to the Office of Budget Responsibility (OBR), the economy shrunk by 10% in 2020 – the largest fall in 300 years – and is not expected to return to pre-pandemic levels until the middle of 2022. Borrowing is also the highest it has ever been outside wartime.
This was reflected in the chancellor’s budget, which combined significant measures to support jobs and businesses with increases in tax aimed at beginning to repair the public finances.
The economic support measures put in place last March were a vital lifeline to people and businesses across Scotland, providing much-needed funding and reassurance in a time of great uncertainty.
As the economy reopens, the demand for working capital will rise, so it is right that government support for businesses and jobs is maintained for the time being. Measures like the extension of the furlough scheme, VAT and the Recovery Loan Scheme are all very welcome – providing Scottish businesses with the backing they need to move beyond survival mode, retain and create jobs, and plan for growth.
However, this level of support cannot continue indefinitely and the true state of the economy will only become clearer as these initiatives are unwound. We must also be conscious of the debt burden many businesses in the most impacted sectors face.
According to figures from UK Finance, gross SME business lending increased year-on-year between 2019 and 2020, from £57bn to £104bn. Outstanding lending stood at £213bn at the end of December, up 25% on the previous year.
Many businesses that borrowed under the Coronavirus Business Interruption Loan (CBIL) and Bounce Back Loans (BBL) schemes had never borrowed before. This is positive in the sense that many are not starting with substantial over-indebtedness, however a lot of businesses will have borrowed more than they anticipated having to and will be expected to demonstrate viability by paying these loans back.
This will be a challenge for some. Many markets have changed and others may no longer be viable, meaning we can expect a greater level of difficulty for businesses in the autumn as government support schemes end.
The chancellor’s Pay as You Grow scheme, which will allow businesses to pay back BBLs over 10 years is welcome. However, further creative recapitalisation solutions, such as debt for equity swaps, will be required to support viable businesses and ensure they can continue to access the funding they need.
The creation of the UK Infrastructure Bank and its proposed interaction with the Scottish National Investment Bank is potentially positive. Business and government must engage effectively to drive the recovery and the financial services industry is committed to working with government, regulators and business groups to develop these proposals.
Looking longer-term, the key to a fair, sustainable and green recovery will be attracting the investment required to drive innovation, fuel growth, and create well-paid jobs – thereby widening the tax base that ensures the proper funding of our public services.
That challenge should not be underestimated, but Scotland is as well-placed as anywhere to market itself as a prime destination for investment, particularly in the realm of financial services. For the past seven years, Scotland has been the most attractive destination for Foreign Direct Investment in the UK outside of London and our financial and professional services exports increased for the fifth consecutive year to £9.2bn, accounting for 40% of Scotland’s services exports.
We must build on this success. We have the critical mass, we have a strong heritage across banking, asset and wealth management, insurance and pensions, and we have an established fintech cluster..
The depth of talent is also a key advantage. There is work to do to ensure we are developing skills required for jobs of the future, particularly in improving digital literacy. We also need to do more to upskill colleagues and provide innovative pathways for today’s generation to enter the industry. However, that does not detract from the fact that we are working from a very solid foundation: the existing skills base is strong and the quality and quantity of educational establishments mean the talent pipeline is being constantly fed.
Perhaps most importantly, the cost of doing business in Scotland is lower when compared with other financial services centres, while simultaneously offering a high quality of life and vibrant cultural scene. This should not be underestimated as a factor in attracting talented people to live and work here, and will be a particular opportunity post-Covid.
The pandemic showed that people in most financial services roles can work effectively on a remote basis. While it would be inaccurate to say offices are redundant, we certainly expect a more flexible approach to location moving forward. Scotland should be ready to seize this opportunity.
Barclays’ new campus and JP Morgan’s custom-built customer contact centre, both in Glasgow, as well as Baillie Gifford committing its future to Edinburgh, are testament to Scotland’s ability to attract investment from major global players.
We have the core strengths; we need the ambition to match.
First published in Scotland on Sunday, 7 March 2021