Uncertainty on top of uncertainty – delivering the next Scottish Budget

Marek Zemanik, Senior Policy Advisor for CIPD Scotland

Marek Zemanik discusses how the next Scottish Budget will be very different compared to any other because of the impacts of COVID-19

The last budget before an election is usually a big deal. You would see a few unexpected initiatives, considerable funding boosts, maybe even some targeted personal tax cuts that can be highlighted on the campaign trail. This Scottish parliamentary session’s last budget, however, will be slightly different. And it will be different by necessity, not by choice.

The Scottish Government will have to present its budget in a cloud of uncertainty. The postponement of the UK budget – for the second year in a row – this is a big challenge given the complex funding mechanisms that underpin devolution. The one-year spending review will give Scottish Ministers a good idea of the expected block grant and, thankfully, the OBR’s economic and fiscal forecast will allow block grant adjustment estimates to be produced. Nonetheless, a degree of guesswork will be required and, of course, the UK spring budget will have an unknown impact, especially if it includes income tax changes.

In addition to what may seem like technical challenges, the twin uncertainties of COVID-19 and Brexit loom large over any budgetary decisions. We cannot predict the trajectory of the pandemic, nor its full impact on the labour market and the economy. At the time of writing, the nature of the UK’s trading relationship with the EU from January onwards is similarly hazy.

The 2021/22 Scottish budget process will therefore be truly unprecedented. However, it will also be the most important budget for this session. The key priority remains responding to COVID-19, but it also presents an opportunity to start thinking about how we move forward. CIPD Scotland will submit a full response in due course, but this article offers an outline of some of our priorities.

COVID-19....:

Safeguarding Jobs

The economic impact of the pandemic on Scotland has been nothing short of staggering. Our GDP fell 19.4% in the second quarter of 2020, following a 2.5% fall in the first quarter. While most recent data show three consecutive months of growth, GDP is still around 10% below its pre-COVID-19 level in February. This resulting impact on the labour market is similarly stark. The Scottish Government’s latest State of the Economy report suggests unemployment peaking at 8.2% under the central scenario. While this is slightly better than previous predictions, it is still around double the pre-COVID-19 levels. Safeguarding jobs and supporting those faced with redundancies will therefore be the key task in the budget.

The range of support provided by the UK and Scottish Governments has been transformative, but both will need to stand ready to deliver more. Direct grant support for businesses affected by COVID-19 closures - in addition to the UK-wide job support schemes - may need to be scaled up depending on the trajectory of the virus spread. As discussed below, there is also a case for further financial incentives to retain or employ staff. Furthermore, the additional funding for PACE (the Government’s partnership redundancy service) is welcome, but small in scale given the likely exponential caseload rise.

In addition, to direct financial support for businesses and employees, we believe there is a particular gap in business support services for the smallest of businesses. Small employers are currently facing a perfect storm with many having to deal with a cash flow crisis while dealing with a range of complex employment relations issues. We know that the level of people management capability is typically very low in micro and small firms, with many struggling to meet even the basic requirements on employment rights even in normal times. Furthermore, the link between management capability and productivity is well documented in research. A few years ago, the CIPD ran three local People Skills pilot initiatives - including one in Glasgow - providing a day of free professional face-to-face support to small firms via CIPD qualified HR consultants. An evaluation of these pilots was very positive and we believe there is a strong case for a national roll-out of the People Skills scheme.

Youth Unemployment

Much of the public policy focus has been on youth unemployment, given the threat the pandemic poses to young people across some of the worst-hit sectors, school leavers and graduates. The long-term scarring effect of youth unemployment during the 2008-09 recession is something we all want to avoid. IPPR Scotland has estimated there could be around 100,000 unemployed young people in Scotland this winter.

In consequence, the Scottish Youth Guarantee has received near-universal support. Originally recommended in June by the Advisory Group for Economic Recovery and conceptualised in a September report by Sandy Begbie, the guarantee calls for a range of interventions to allow every young person in Scotland between the ages of 16 and 24 to access either a job, an apprenticeship, study or a volunteering placement. At the time of writing, the launch of the guarantee is still only being planned, but we expect it to formally launch in November.

The CIPD has been clear in our support of the aims of the guarantee. There are, however, some clear challenges that will need overcome for it to have the desired impact. Chief amongst these is the need for deep cooperation between three levels of Government and the public-private and voluntary sectors. The guarantee is designed as an umbrella for several initiatives, including the UK Government’s Kickstart Scheme, which could be a source of tension. Some proposals - like the wage subsidy scheme - look challenging to design under the current devolution settlement. Lastly, with most of the funding attached to the guarantee channelled through 32 local authorities, there are additional fears of complexities for businesses.

One of the elements of the guarantee is access to apprenticeships. This is crucial, given the evidence from past recessions about the drop-offs in apprenticeship numbers as well as a general drop in companies’ learning and development spend. Proposals to allow a sharing of apprentices are welcome, but there is currently a gap in the provision of direct incentives to hire and retain apprentices to complement the existing “Adopt and Apprentice” scheme by SDS, which incentivises the hiring of redundant apprentices.

Upskilling and Reskilling

In addition to a focus on young people, interventions will be required to boost upskilling and reskilling programmes across the workforce, provided unemployment levels rise as projected. We have previously supported a broader transition training fund being introduced and were pleased to see it being announced in the Programme for Government.

That being said, the funding attached to the scheme is likely to be insufficient given the scale of the challenge. Based on the previous experience in the oil and gas sector, we know the average cost of an intervention is in the £2,500-£3,000 range. This means the announced funding will help a maximum of 10,000 workers. For comparison, the report by the Enterprise & Skills Strategic Board sub-group on Measures to Mitigate the Labour Market Impacts from COVID-19, published in July 2020, modelled this proposal at 80,000 workers and a cost of £200 million.

…and Beyond:

The Future of Work

The most obvious longer-term change of the pandemic is the dramatic shift towards flexible work. CIPD research suggests that Scottish employers expect homeworking in particular to more than double from pre-pandemic levels. Additionally, emerging evidence suggests that there won’t be a hit to productivity that some expected, although this requires a lot more work – there will be big differences across sectors and in individual circumstances. We believe it will be important that policymakers and employers don’t lose sight of these differences and that a focus on homeworking does not crowd out the broad range of other flexible work options – like job sharing, flexi-time or term-time working - which may suit individuals better.

In addition, there are some potential interesting public policy implications associated with this shift. First and foremost, the importance of closing the digital divide has been amplified further and, in addition to significant capital infrastructure investment, a focus on digital upskilling will be crucial. Other impacts on transport or housing policy are also likely to emerge.

Job Quality

The pandemic has put the quality of work debate in sharp focus. The Scottish Government should be commended for leading the job quality agenda UK-wide over the last few years, with their commitment to fair work principles and the support given to the Fair Work Convention. Job quality is arguably even more important during the post-crisis recovery, with a renewed focus on flexible working, work-life balance and health and wellbeing. In Scotland, that means continued support for fair work principles across government and its agencies and a concerted effort to bring businesses across sectors and of all sizes on board too.

A meaningful measurement framework with aligned fair work indicators, allowing us to track progress across Scotland’s economy, should therefore be developed as a matter of urgency and added to the Sottish Government’s National Performance Framework. An option would be to adapt CIPD’s Good Work Index to align with the Fair Work framework.

Our discussions with employers have found that while many businesses are already working to the Fair Work framework they do not necessarily use the same language, or even know that they are meeting the criteria. We know that employers are not inclined to disagree with the content of the framework. This suggests that there is a clear need to better articulate what Fair Work means in terms of individual business practices.

Skills and Training

The pandemic has only amplified the need to tackle some of the underlying problems in Scotland’s economy. Levels of over-qualification (for example reported in our own Working Lives Scotland report) suggest inefficiencies in the relationship between the labour market and the skills system. Flexibility in skills development, strengthening of vocational routes and better lifelong learning provision should all be high on the agenda.

In their recent report on Scotland’s apprenticeship system, the OECD makes a series of recommendations which aim to reform the system into a more responsive and agile one. The speeding up of qualifications, making the system truly employer-led and rebalancing vocational and academic education are all steps the government should commit to. In addition to this, the Government should build on progress shown during the last few months and work with providers to expand the digital learning offer in Scotland. More flexibility in employment patterns should be mirrored in learning flexibility too.

This flexibility is especially important in delivering the necessary step-change in lifelong learning. The combination of demographic change and the speeded-up spread of so-called industry 4.0 will require a transformation Scotland lifelong learning offer. This will require changes to qualifications, skills development provision and individual incentives. On the latter, the CIPD has long supported form of personal learning accounts, which could be an evolution of Scotland’s ITAs, as a way of stimulating individual demand for lifelong learning. We will shortly be publishing research in this space with specific proposals for the Scottish Government.

Conclusion

The upcoming Scottish Budget will have to be delivered in the most challenging of circumstances. The uncertainties of putting together a budget before the Chancellor has detailed his spending plans are compounded by the twin uncertainties of COVID-19 and Brexit.

Yet, it will be the most important Budget of this parliamentary session. It will need to outline further measures to deal with the rapidly escalating economic impact of the pandemic, but it will also need to start paving the way towards a new post-COVID-19 economy. At the CIPD, we will keep making the case for job quality, skills development and inclusion to be at the heart of these plans.

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