Good morning and welcome to the 30th meeting in 2022 of the economy and fair work committee. Our first item of business is a decision to take items 3 and 4 in private, our members content. Our next item of business is an evidence session on Scotland's economic outlook. The purpose of today's session is to consider the key economic trends facing an economy and to look towards the challenges of 2023. We will have further sessions on that before the end of the year. I welcome Professor Jhajit Jata, who is director of the National Institute of Economic and Social Research, who is joined by Emma Congrieve, deputy director of the Fraser Valenda Institute and Susan Murray, director of the David Hume Institute. As always, if members and witnesses can keep their questions and answers as concise as possible, we will get through a lot of questions in business this morning. Can I start by asking the witnesses about inflation? We have heard news this morning that inflation has slightly dropped on where it was last month. We, as a committee, took evidence from the hospitality sector a few weeks ago that inflation rates have had a huge impact on many areas of the economy, in particular hospitality. We have always seen a slight decrease that is anticipated that next year will see a decrease come down to about 7 per cent, but when will that have a positive impact on businesses? Is it likely to start to make those sectors that are under huge cross pressures more affordable? When is that likely to happen? If we go to Professor Jata first of all to give an overview of the situation at a UK level, that would be helpful. Thank you very much for inviting me to give evidence this morning. I apologise for not being able to be there in person, but the transport problems currently facing the UK have been beyond us to arrange this morning. Thank you for allowing me to give evidence online. The inflation shock that we are suffering is extremely unusual, given the backdrop of the last 25 years. The average inflation rate since May 1997, not until the early part of this year, was around 2 per cent. People are experiencing inflation levels that they are not expecting or able necessarily to understand, so an important part of the process for the last few months is explaining what the causes of the large increase in inflation are. They are very much associated with the increase in gas and energy and food prices directly caused by the Russian invasion of Ukraine that has elevated prices in international markets, which are set in dollars, against an exchange rate. As you know, the sterling has been rather volatile this year, and that has led to a large escalation in domestic prices and generated inflation in double digits. We do not think that that is going to come down to something associated with normal levels of around 2 per cent for a couple of years yet, but we are looking at something like 2024 or 2025, which means that throughout the course of next year, inflation will be very high by what we now consider to be normal standards. As you said, that will place pressure on many households and many industries in terms of containing their costs and also thinking about where they set their final costs for consumers, who are also in the bottom part of the distribution suffering from the cost of living crisis. Those are very difficult and precarious times. Emma, do you want to come in on Fraser Vallander's work around the impact on the Scottish economy and how pressures can be relieved on the sectors that I have referred to already, hospitality in particular? Of course. We are facing the same pressures that I have faced in the rest of the UK. There is nothing that is different in that sense in terms of the key drivers of inflation. I suppose that what we are thinking about in terms of how that affects the economy is what is in place in order to mitigate some of the impacts of that high inflation, which is out with the control. The drivers of inflation are out with the control of UK and Scottish Governments. A key thing that we are looking for in a new year for both businesses and consumers is the key question around what will happen to the support for energy costs in April. As yet, we do not know what that will be. That is a huge concern for businesses, particularly in the hospitality sector, because they are going to be facing a very difficult winter in terms of making decisions about whether they are able to keep open through that period. Of course, they will be thinking ahead as to what happens after that. That is the key unknown at the moment in terms of the outlook and how it will affect businesses, is what support may or may not come through for energy costs in April. We have just come to Susan. If I would change the direction that I will be with Susan in terms of employment, it is what the impact of inflation is having on employment. At the moment, I think that there are figures out today saying that Scotland has really high employment. I think that I have also seen figures today saying that women's employment is higher than it has been for quite a long time. It is a really buoyant labour market, but it is also a really tight labour market. Looking at the papers, there were also suggestions that unemployment is starting to keep up. There are concerns that, as the labour market is so tight, businesses are under so many cost pressures that, even in areas where it is quite buoyant, they will start to contract because of the other pressures in the economy that could lead us to a situation of employment. Can you do some forecasting around what we can expect to see next year in terms of employment? Yes. There are lots of different forecasts out there, depending on who you speak to. However, the general consensus is that people are a bit scared about what might be coming down the line. We have done more work with the actual labour market and the workforce than we have with businesses. Businesses know that they have a labour need at the moment in terms of recruitment, but they are not necessarily sure that they want to recruit because they are worried about a recession coming next year. When you look at the predictions of people cutting back on spending, there are a lot on everything that we track in the understanding Scotland survey, everything that people might spend money on that most people are planning to cut back on. Nine out of 10 Scots believe that general economic conditions are going to get worse next year, but the thing that worries me most in terms of the labour market is that one in four people are losing sleep over their finances. If you take that in terms of the labour market, your labour force becomes less productive if people are losing sleep. If we think about how businesses stay profitable and continue to thrive, if you have large numbers of your workforce losing sleep and the figure rises with parents, it rises to 35 per cent of people with children. If you have people more anxious than losing sleep over their finances, you are going to have less thriving businesses. Professor Chatter, do you have any comments or reflections on employment and where we might be next year in terms of employment levels? I have my own analysis. We do a devolved national analysis every quarter as well as the UK analysis. I hear very much the concerns that households have about finances, increasing mortgage costs and food costs. However, in terms of employment growth, Scotland does pretty well relative to the rest of the UK, about a per cent growth in employment higher than the rest of the country. There are high levels of productivity in Scotland compared to the rest of the country if you take out London and the south-east. As a result, employment growth looks more resilient than we might have anticipated. There is some good news in the middle of all that bad news. Employment growth looks reasonably robust in Scotland, partly kicked off last year by COP26, but that seems to continue over our forecast horizon. For example, we do not expect positive employment growth in the whole of the UK until the end of 2022, but across our forecast period of 2022-23-24, we see positive employment growth for Scotland. I am going to bring in Graham Simpson to be followed by Fiona Heslop. Thank you very much, convener. I think I'll start with another question about inflation, and I'll start again with you, Professor Chadder. First of all, I just congratulate you for managing to get the word hipster into a report that you wrote fairly recently. Well done for that. On inflation, I noticed that the Bank of England published its monetary policy report recently, and it was predicting that inflation could fall to 1.4 per cent by the end of 2024, which is quite a dramatic drop. I just wonder what you think that's based on, and do you think that there's any prospect of that happening? Where inflation goes is absolutely a function of where bank rate goes. The bank itself was clear that there are a number of scenarios for bank rate, one that would be where bank rate rises in line with market expectations, which, as you will recall last month, were fairly broiled as a result of the mini-budget, which we may want to come to a little bit later on. Those expectations, where bank rate might rise to 5 per cent or more and stay there, had some advantage of leading to a faster fall in inflation, but at the same time, a deeper and more prolonged recession as demand, which is particularly sensitive to rapid increases in interest rates, kept at a high level for a long time falling more quickly than the bank ideally would have wanted. The overall sense from the bank is that inflation, which is the change in prices, will start to move out of the window of comparison. The large increase in prices were at the turn or early part of this year, and as we move forward over time, that 12-month window of comparison will disappear. As a result of that, inflation will start to come down. The danger is that, if we raise interest rates too much, the core level of demand in the economy will fall too quickly, which will lead to inflation falling too quickly as well. Overall, there is the prospect of inflation coming back in line with price stability by about 2024, which is not inconsistent with something around 2 per cent at the end of 2023. However, we will not want to see that happen too quickly, because that itself would suggest that we would have a deeper recession with more unemployment than we ideally would want as a society. Although inflation is the issue, the big issue is that we need some inflation. We do not want to choke off inflation altogether, because that could have harmful effects. That is right, but we do not want to bring down what is an inflation caused by external factors too rapidly, because that would imply a deeper and longer recession than would otherwise be the case. A lot of the inflation that we see will essentially work its way out of the system as the one-off increase in prices moves out of the frame of comparison, which will happen as we move across next year. That said, there is some possibility of what economies are called second round effects, where people who are setting wages and prices have just talked about that with hospitality start to factor in higher inflation expectations into their processes, which means that inflation will stay a little bit higher for longer. That is essentially why the Bank of England has to raise interest rates to say that we are targeting inflation of 2 per cent a couple of years down the line and will set bank rates accordingly. I think that that is still the most likely scenario that we will get there in about a year or a bit, rather than in the next few months. If I can widen it for the other two witnesses and ask how confident are you that the economy generally can recover over the next year to 18 months, say, and if we maybe start with Susan and then Emma, can you give us any Christmas cheer, because everyone seems a bit gloomy at the moment? I'm not sure I can. I feel a bit like the people answering the understanding Scotland survey in that I'm a bit nervous about what's coming down the line. I think that's because in recent years we've had several—the term that we hear a lot is unprecedented shocks, but we know that we're moving into a period of a bit more global instability than we've had before. You can look at all the variables that we've got now and think, well, we might be okay in a year to a year and a half, but what if something else comes? I think that's what makes me worried at the moment. I think that's coming through in lots of surveys that we see. It's how do you build back confidence that people feel a bit more resilient if there is another shock down the line? We can't guess what those shocks might be. We saw a few years ago an eruption era in Iceland through everything off for a good few months. I think that the bigger question is how do we make Scotland and the people in Scotland more resilient to cope with whatever is throwing us in the future? Emma? Maybe not too much in the way of Christmas cheer, but we have seen what we've been through over the past few years in terms of the amount of shocks that the economy has been considerable. A lot of the reason why the economy, particularly the labour market, has been a bit more resilient than we maybe would have expected. There has been some quite effective government policy coming down the line from the UK Government mainly, but also Scottish Government playing its role, too. Part of what we're hoping for in terms of Christmas cheer is that policy will do what it needs to do to mitigate the impact of the worst of the inflation in terms of energy costs and will provide the right kind of support to households and businesses to get over this hump in the next couple of years. When we had the autumn statement and the forecast from the OBR, they were a little bit more optimistic than the Bank of England, who came a couple of weeks before. Partly, in recognition of some of the measures that were in the autumn statement, they are putting a bit more money into the system to try and keep the economy booked, to ensure that the recession is as shallow as possible. I guess that's good news. There are things that the Government can do to help with this, but, as I said in my earlier question, there is a bit of a gap in terms of knowing what those decisions are going to be. The fact that we've had so many changes of policy and businesses and people at home are uncertain, because there are reasons to not be sure whether the Government is going to do the right thing, but, hopefully, they will. You can have one more question. I think that Professor Chadd would like to come in on this as well, if you want to invite him. Oh, okay. Maybe you can answer this when he comes in. I was just wondering, we've got a statement from John Swinney tomorrow. If you were speaking to him today, what's the one thing you would ask him to announce tomorrow? I wouldn't like to ask a political leader to make any announcement, but I think that I would go back to the point that I made some moments ago. The one important development in the British labour market over the last couple of decades is that employment rates have continued to be high. So, after the financial crisis and even during what has been anemic economic growth in the last 12 years with the Brexit process, let's call it that, Covid and the war, employment has remained high and stable and unemployment rates are below what we normally think we would expect to see in an economy of, say, 45 per cent or unemployment rates are below that. The one thing that concerns us and might help the economy more is to think about inactivity rates. Why is it that older people have left the workforce? I think there's some good reasons there. It's concerns about Covid, concerns about interacting, but also many younger people also around the country seem to have left the labour force through long-term illness. And I would like to think about how can we address that because if we can get people back into work, work is much more important than just the income that you get, the social interactions, the learning by doing, the connection with society. All of those things are so important in the world of work and to see that inactivity rates across the country may be increasing is something that I would like our political leaders to think a little bit harder about. Before we bring in Fiona Hyslop, I want to ask Professor Achada. We have high employment, but we also know that there are quite a lot of people in low-wage employment that are living on the bread line and that are requiring greater support from the Government. Is that more than employment? It seems really positive that we have high employment rates, and it is, but there is a significant amount of people who aren't earning enough money to keep their families and keep their mortgages and put food on the table. What changes do we need to see in the economy? That is a huge question. If I may have to answer very briefly, of course you are absolutely right. Am I online now? I am not sure. Someone just told me. Can you hear me? You can't? Sorry, it is just like glitching in front of me. Forgive me for that. You are absolutely right. We have been terribly concerned about the increase in destitution across the country with people with a much larger fraction of people in lower income brackets, despite the increase in employment. The cost of living crisis is amplified for those households because they tend to spend a much larger fraction of their disposable income on food and energy. There is absolutely a need to provide support for them. We are seeing worrying increases in access to food banks. If we move a little bit further up the income distribution for those people with mortgages, there is a concern that higher interest rates may leave some families unable to meet their interest payments or, indeed, if they are renting, as rent starts to go up. We certainly need to see some more level of support there. However, as a long run in terms of getting those real wages up, the national living wage has helped, certainly, but that is not what we want to aim for. That is not the best, that is okay. However, to raise wages in the longer run, we need to think about productivity and how it can be that the return from an hour of work leads to more output than we currently see in a large fraction of industries across the country. That is a deep problem facing the UK economy, and it is a lack of infrastructure, a lack of skills, connectivity at the broadband level and, underpinning it, we have learned from the Covid crisis as well. It is really important that our healthcare, social care and education services are also supported in a way that perhaps they have not been in the past 12 or so years. All of those things, I think, lead to a lower level of productivity and a lower level of real wages for households in the lower parts of the distribution. That is said for people who are lucky enough to have high levels of education or human capital and, with the appropriate networks, wages at the top in the distribution have done exceptionally well. However, I think that that level of inequality is a severe problem facing society, one that has to be addressed. We cannot address it tomorrow, but it is very important that we discuss it and think about the appropriate policies that are consistent with the narrative that I have just outlined and address them. Thank you all for joining us this morning. I would like to ask the same question to all of you, but I will start with Emma Congry first, if that is okay. I would like to ask your view on Brexit already baked into UK and Scottish economic performance, or do you expect to have a continuing and latent impact? If so, what do you think that that will be? Part of the problem that we have is that when Brexit finally occurred, we were in the depths of the pandemic. It has been really difficult to separate the impact of Brexit from what was happening in the economy anyway, so that is the first caveat, I am afraid. We often get challenged on this by people who have very different views on it, and because the evidence is not clear, it is really difficult to say with a lot of certainty, but it is very difficult to see a scenario in which Brexit has not had an impact in terms of the frictions that it has introduced into trade, the restrictions on the freedom of movement and, potentially, that has been exacerbated by Covid, because people living elsewhere in Europe may have been home during the pandemic and could not come back as they would have done otherwise had Brexit not occurred. All of those I would expect will be feeding into inflation and into GDP. Whether or not that is already baked in, I think that a lot of it will be in the system now and is part of the issues that we are facing at the moment. In some ways, it is a shock that happens, but it has an on-going legacy, and it means that things that we have taken for granted before, such as free movement of labour, very flexible supply chains and things being able to move without those frictions, will continue to be an issue for people. It will take quite a long time for the economy to adjust to the new normal, but, because of the issues that we have been through in the last few years, it is quite difficult to separate those facts out, which I know is frustrating because we do not have that black-and-white answer, but I think that is where our work at the institute has got us to do in terms of what we think in practice. Going forward, it may be possible to do some more comparative analysis with other countries in Europe once we have a bit more out-of-date to try and disentangle some of those things. I am very conscious that it is a big question, so perhaps if I come to Susan next, please feel free to do a top-line summary if that is helpful. Susan, please. Thanks. Emma, you are doing really well and I am mindful of time, so I will not add anything more in terms of whether it is baked in. I think that it is too early to tell that we are seeing some effects from a top-line summary. Thank you very much. The overall view about the Brexit process that we have gone through, because I do not forget that we had a number of years of uncertainty that also held back many investment and FDI plans before Brexit was announced, because there was a sense of what would actually happen in the way that we have. We have a form of Brexit that does not look like it will be the final set of relations that we have with the European Union or, indeed, we have not yet established the trade agreements with the other parts of the world in the way that it was said that it could be done much more quickly than it has turned out to be the case. That continues to inject uncertainty in our trading relations not only in terms of manufactured goods and services, but also in terms of capital allocation around the world. That is continuing to act as a drag on our economic performance. At the National Institute and other places, we think that the overall impact of the Brexit process that we have had on GDP—a measure of output—is some 4 to 6 per cent. However, just to go back to a point raised by Emma a minute ago, Brexit itself is interacting with the next set of shocks to make them worse than they would otherwise be. Labour has not returned after Covid. The shocks that we are seeing from food and energy have been exacerbated on domestic inflation and exacerbated the negative impact on GDP because of the Brexit process. Even though it has happened, it continues to interact with the shocks that come along to make them worse than they would otherwise be the case. It has not been so far a great story for the UK economy. I want to address the issue of investment. Each economic crisis can be different. After the financial crash, the Scottish Government embarked on our construction-led investment recovery. In 2010, it was estimated that about a third of all construction in the UK at that time was in Scotland underpinned by the Queensbury crossing rail, etc. However, clearly, inflation and other aspects will affect the ability—you have talked about it already—to invest in capital for businesses. I am interested in your take as to where we are in business investment. In particular, looking at the recent UK Chancellor's budget statement, what the impacts of that will be on business investment and, for the Scottish economy in particular, renewables is very important to us, as it is to the rest of the UK economy, but particularly in Scotland. What impact will the measures in the UK Chancellor's statement have on investment for recovery? Do you think that that is a route forward for this crisis or because of inflation? Is that somehow constrained? Professor Chatter first, and if we have time, I will be interested in the other perspective. I will keep my answer brief and give Susan and Emma time to answer. The level of business investment following 2016 looks like it is somewhere in the order of 15 to 20 per cent below where we had anticipated it looking at the previous trend. Businesses have clearly deferred investment plans as a result of the uncertainty over Brexit and the trade relations, as well as the economic and political uncertainty that we faced in the last few years. That is a major cause of our worse economic prospects than we might otherwise have anticipated. That is something that very much needs to be addressed. At the same time, public investment has, to some extent in the past couple of years, improved, but it has not yet offset the long-run secular decline in public investment. Public investment in the UK in the last 40 years has averaged around 1.5 per cent of GDP—it should be around 3 per cent of GDP. As you were hinting with the autumn statement, even though there are plans to continue the nominal amount of public expenditure, the inflation shocks will mean, over the course of the planning horizon, that public investment will fall once again far below that 3 per cent of GDP level. That, in the longer run, is also problematic. It is not only because public investment helps the economy, but it interacts and provides support for businesses and private investment. Those are not separate things. Sometimes they are treated as, if we have more public investment, that means that taxes will go up and businesses will not invest. I do not really think that that is the right way to think about it, but to interact in a positive manner. There are positive spillovers from the right form of directed public investment of the type that you described in Scotland that provides confidence for business investment. I do not think that we are there yet. There is an attempt to unlock the financial sector to provide more investment, but it is a concern that we are not entirely sure where that will end up. There is a tendency of the financial sector to look towards London and the south-east. Will that help with levelling up or the economic prospects of the devolved nations? It is not entirely clear, because we are not sure that we have a financial sector that looks after the whole of the country, rather than just London and the south-east. That is a question to be asking policy makers in Westminster. Finally, FDI, foreign direct investment, has not done particularly well in the last couple of years at Berlio. It is very lumpy, so just a small number of changes can lead to a large change in the actual pattern of FDI, but it is something that has been affected by all the things that we have been talking about. It may be something that the Government of Scotland may be able to reach out to people overseas to invest directly in the country, and that would be an important avenue, potentially, for the Scottish economy. Susan Murray, if you want to comment on where you see business investment as a result of the UK Chancellor's statement and what you might expect or want to see from the budget from Scotland to help business investment and potentially the impact of public investment on that private business aspect. I was struck by the recent call at the Scottish Chamber of Commerce annual dinner from Liz Cameron, which encouraged everyone to have confidence and invest. I think that so much of business investment is around what people think is coming down the line. Are they confident that we are going to go through a quick recession and is now the time to invest so that they are stronger and more ready to take advantage when we come out the other side of higher inflation? I am really struck by how that links with the general population, because business owners are also people who are seeing the effects on their own lives. We should not underestimate that kind of circle. One of the questions before links with that is what we want to see in the coming budget. In order to attract foreign direct investment, we need to stick the course with the things that we have said that we are going to do, particularly the targets to reduce child poverty. We know that that is going to be really challenging times to do that, but we also know that that is a really good thing for the economy to do, because we end up with a better equipped workforce. We end up with parents more able to support their children and their children to go on into work. Those long-term commitments that we have made on child poverty and on climate change have got to still be part of the plan, even though we have immediate crises going on. That is the really difficult juggling act that, when you have a constrained spending envelope, it is going to be tricky to do, but that is going to be what investors want to see. Finally, to Emma Congrieff, if you can address the views on business investment, and particularly around renewables, certainty and pipeline encourages people to invest. Clearly, some of the issues around the UK chance of statement may have an impact on that. I would be interested in using whether you think that it will or not. Clearly, that is an implication for the Scottish Government in terms of its certainty, in terms of where businesses can invest, particularly to deliver renewable energy and net zero. You are absolutely right that that industry is the renewable industry and the growth over the past decade or so is an example of where a certainty of government policy over a long-time horizon has led to investment. I think that that is an important point. Again, the government policy can be effective, but where there is uncertainty about what is coming, what may or may not be the next decision or u-turn or whatever, that puts businesses in a very difficult position. I cannot talk specifically about renewables. It is not the area of my expertise, but certainly we have done a lot of work with hospitality businesses and working with them to understand what the big barriers are to them having certainty over the future in terms of their investment. The top two things that came out for the next decade is uncertainty over the security of energy. That comes back to both what is going on now but also the need for that long-term investment to ensure, as much as possible, that there can be more uncertainty going forward. For them, it was the effectiveness, or otherwise, of government policy on policies directed towards their sector. Again, it is needing to feel more confident that the right things were being done by the industry. I should mention that one of the things that came up in terms of not giving certainty is the bottom return scheme that is coming in next year. It is not feeling that it is not being thought through by the implications that it will have on businesses. Again, there is a lot of conflict between policies on net zero and day-to-day business. Just one point that I would make about tomorrow is that we should be getting some decisions on non-domestic rates. We are going through rates revaluation at the moment, which comes into force in April 2023. That is a huge concern for businesses. They do now have to know what their rateable values will be for the year ahead. We will be waiting tomorrow to see what the decisions are being made on poundage and, indeed, the relief—anymore relief—that are coming through the system. There was someone else's new autumn statement for the rest of the UK that may come through into the Scottish policy, but that is a really important part of other businesses' bottom line. So, certainty and food evidence-based policy on the reliefs that are in that system will be really important to me. I am going to change the order and bring Gordon MacDonald in, but, Michelle Thomson, did you supplement it? Could it be directed to one of the panellists, please? Is that possible? I think that it would be to Professor Chada. It was just picking up on the point of Brexit. I am on the finance committee in the Scottish Parliament. We had the OBR in yesterday, who, of course, commented on Brexit in their economic and fiscal outlook report of November 2022, basically saying that it had had a significant adverse impact in quoting various stats about trade volumes falling 8.3 per cent below the present in quarter 4, 2023. However, an interesting comment that they made was about trade intensity being 15 per cent lower than if the UK had remained in the EU—in other words, trade intensity—a measure of country indication with the world economy. I asked what their outlook was for that to continue, and their comment was that they anticipated that to continue for at least another 15 years, despite the trade deals that have been done. I just wanted to ask whether you are aware of that and if you get any further reflections on the outlook in the light of your comments yesterday. It is clear that the Brexit process has reduced trade intensity with this huge economic block across the channel. It is difficult to see why that would not stay at the lower levels that we now see for quite some time to come. As a starting point for assumption that the OBR's view is probably about right, I am hopeful that, over time, we might reverse some of that fall in trade intensity as we collectively come out and recover from Covid and the oil gas energy price shocks and food price shocks that we are currently absorbing. I see that as a central case being quite sensible, but I see positive risks on the upside from that. The world in which it might well be better than we are envisaging, but for planning purposes I would very much agree with the OBR's view. I want to address my questions to start with Professor Chadder. We have talked about the Labour situation and I want to come back to you in a couple of things on what you said earlier. You are quite rightly highlighted that employment remains high and Scotland is certainly at record employment levels at the moment. Unemployment rate is lower than what it is in the UK and inactivity rate is lower than what it is in the UK. Could you say something about the record vacancy levels that are in the economy? I do not have a Scotland number, but I know that across the UK it is about £1.2 million. What impact that is having on the economy and how we address it? The vacancy levels are very much driven by both the inactivity issues that we have talked about with people with drawing from the labour force following Covid, as well as what was said earlier, the tendency for people who had jobs in hospitality, recreation and other areas, often from overseas, not returning after the Covid period, meaning that there are gaps. Over the longer run, one can hope that particularly education, further education colleges could be deployed in order to train people to work in the areas that seem to be short. In the short run, not a lot, it seems to me, can be done other than consider the wages being offered that provide more incentive to close some of the vacancy gaps. It is a major concern that we have vacancies at the same time that we have inactivity rates rising. I think that the balance of that will be to put some upward pressure on real wages, and that is no bad thing if that can help alleviate some of the cost of living crisis. A large number of the vacancies are in the lower-income or wage areas or industries in which wages have historically been low, so that might be addressed as a result of that. You have touched a couple of times about inactivity rates. I do not know if you have the Scotland numbers, but I like looking at the long-term trends. In May 2007, which was a long number of years ago, the inactivity rate in Scotland was 21.4. The recent inactivity levels for October 2022 is 21.4. The exact same percentage as it was 14 years ago or 15 years ago has been changed in the inactivity levels, given that currently 87 per cent of those inactive are students or family commitments or long-term sick or retired. Has that changed from the situation in 2007, where it was the exact same percentage of the employment rate? You are asking about the composition of inactivity. I guess that my comments just now were focused on the changes that we have seen since the Covid cloud started to lift. I do not know off the top of my head what the inactivity rates were. It is the late part of the last decade, 2018-19, but my guess is that they were lower than we are currently seeing. The most recent trend is for that inactivity to increase, and you are quite right to say that it is in the areas of students and long-term people who have been unwell over a long-term basis, as well as older people leaving the workforce. It is still a little bit early after the Covid crisis for us to say that those people will not return to activity. My guess is that once we get past the winter and we go into the spring, people will reassess their prospects and we may well see people entering the labour force again, particularly as the cost of living crisis continues to hit over the course of next year. It is a great fact to hear that we are at the same level of inactivity level in Scotland as we were some 15 years ago, but my guess is that that will start to fall as we proceed over the course of next year. Can you tell me what the links are between growing population and productivity? There are three main drivers that link to the labour market and to economic growth. Population is one of those. Participation is the other, which you have just touched on, and productivity is the other. They are interrelated, but they are also drivers in themselves. I think that in terms of productivity, that is very much in terms of how the people that we have in the labour market at the moment are able to perform their work. There are various reasons that come into that. I think that one that I would write to to talk about is inactivity and the driver of that in terms of long-term health. Not only does that have an impact on participation, it also has an impact on productivity in the workplace, which Eusen touched on earlier. We are starting to make those links between the stats that we see in terms of issues in the health sector, in terms of long waiting lists and potentially people living with chronic pain and ill health for a longer time than would have otherwise been the case, and the impact that that has on their productivity in the workplace, as well as their ability to work in the first place, and also the pressures on the social care system and the impacts of people needing to do more and paid care as a result of the care system not being able to pick up all the needs that is there. I am probably not answering maybe exactly what you wanted to hear, but participation, productivity and population interrelated, but they are also their own drivers in themselves. The reason for asking the question is that we may well be able to increase employment from folk that are inactive, but that is not going to fill all of the vacancies that are available to us. We are sitting next to Europe, where the unemployment level is at 6 per cent, we have Spain at 12.5 per cent, Greece at 11.5 per cent and France at 7 per cent, where there is a readily available workforce that previously came to the UK and Scotland to fill vacancies in hospitality, et cetera, where we know that we have a problem. I am just wondering what you think has impacted the loss of freedom of movement on the economy. Well, I think that as you laid out, it is the fact that we have record vacancies and we have not got the ability for that flexibility of people to move across borders in the way that they were before. This is a big shock to the economy, a big shock to those sectors that rely on that labour, but they will adjust over the long term, they will have to. It may lead to some businesses no longer being viable, absolutely, and I think that rural areas are particularly vulnerable to that, because they require people to relocate and sometimes need to provide housing in order for them to be able to afford to live in the area. There are a lot of factors going on there, but certainly that is part of the story here. It is not the only issue that is driving vacancies, but it is a big part of the story. I want to ask you about the number of registered businesses in Scotland and how important that is for growing the economy and providing new jobs. Looking back at the time series for the number of registered businesses in Scotland by all different sizes, in 2006 there were 147,000 and in 2022 there were 175,000, but that is a growth of 19 per cent. Similarly, for all businesses, both registered and unregistered, that has grown from 267,000 to 360,000 in 2022. If we have that contraction in labour, what impact is that going to have on the growth of companies in Scotland and GDP for that matter? That is a really interesting question. What is hidden in the numbers that you have quoted? There are also other trends. The number of those businesses that are only employing a single person, so director-led companies, has a massive skew on those numbers. We have seen that particularly over the past 10 years. If he took out those from the trends and looked at those numbers again with the number of those businesses that employ other people, I think that you see a different pattern. I cannot remember it off the top of my head. If we have a contracting labour market, we are going to have a problem. Emma has already covered that, and I know that we are short of time, so I will not go into that too much. Just to be clear, every single category of employer has shown an increase since 2006. I thank you for joining us this morning, and I thank you for your comments so far and the materials that your organisations have provided. I want to follow on from some of Gordon MacDonald's questions about the interaction between the economic outlook, the budget discussions that we will have tomorrow and the broader recovery that Professor Jadda, you have talked about, and the consequences from Covid Brexit and the like in the current economic climate. Emma, if I can come to you first, in your budget report that Fraser Vallander Institute published just this week, there is a very stark comment around social security and the consequences of some of the labour trends that we have been talking about and the increased reliance on social security. We know that social security spend is going up for significant policy and other reasons, but I wonder whether you could say a little bit more about how you see that interacting and potentially providing a more unstable or more volatile economy in the future if people are not being able to get the social security support that they need even though the spend there is increasing. Thank you. There are two main types of social security spend. We have the means tested support, which is largely governed by the UK Government or the Scottish Government, with the Scottish child payment that has moved into that area with its new powers. Then we have the non means tested disability and care support, which is designed to cover additional costs of real health. In terms of what is happening in Scotland in terms of social security, we have seen from the plan set out in the spending review back in May, and it is quite stark in our report when you see it on the graph, the projected increase in social security spending. A lot of that is around the Scottish child payment, so because that is ramping up this year, both in terms of the amounts being paid, it is now up to £25 per week per eligible child, and it is also now open to all children rather than previously, it was just limited to children under five. That is what is happening there, and that is a big part of the increases. The other part is that there is, and there may be some more shots in this tomorrow, there is on the disability side that are signs, and this was in the OBR forecast, that there is an increased caseload coming through on to personal independence payment, which is the UK benefit, which transitioning in Scotland to adult disability payment, but we still have the PIP caseload there, which has been increasing this year in Scotland. That is another reason, and some of that I think was in that May forecast, but there may be some more. That is the mirror of what is happening in the labour market in terms of inactivity and ill health, showing up in the social security statistics. In terms of whether all the needs are being met in terms of the social security system, I think there are concerns there, but mainly because of the years of austerity and the reductions that happened then, meaning that social security fell behind in terms of being able to keep up the same standard of living for people. We have seen in the autumn statement that the UK Government has increased the upgrading of those benefits in line with inflation, so they will increase by around 10 per cent come April. We expect that the Scottish Government will be doing the same with the benefits that it has a responsibility for, apart from the Scottish child payment, because it has only just increased it. We are not sure whether we will see a 10 per cent increase in that come April compared to its current value. It is such an important part of the system. At the moment, it seems to be keeping up with things, but because of what has happened in the last 10 years, it is behind where we would like it to be in terms of giving equivalent support to what we would have hoped had we not had austerity. I suppose that the trends that we have seen over the past 10 or 12 years since the financial crash might, in part, come back to one of the other points that Gordon Gordon was making about the different composition of employment of labour market inactivity and, therefore, the increased reliance on social security. I wonder whether you have any comments or any pointers for us about the focus on employment of people who have chosen or who have taken themselves out of the employment market for health reasons, for caring reasons, and whether we need to be focusing more on that in terms of getting more people, single parents, back into employment. This is not about employability figures, because we know that employment figures are as high as they are. It is that untapped potential, I suppose, and that economically inactive group of people that probably want to work but can't for a whole range of other reasons social security being one of them. I wonder how we can tease that apart and make a connection in a way that is economically positive rather than an economic drain in the long term. Emma, sorry, I don't know if you've got any more to say, and then I'll come to Professor Chadder on this. I'll just come in. As you say, there are many reasons why people who are inactive are inactive, and some of them do want to work. Whether or not it's a social security system that is a barrier to that, I think that there is evidence that that is the case for some people, particularly those on some of the disability benefits. We think that some of this is kind of the sphere of, if you try to go back to work when you've been ill, or the fact that you've tried to work, even if it doesn't work out for you and you have to combat that there might be some implication there for all of the benefits, not just your means-tested ones but your additional cost benefits as well. There's a lot of fear and uncertainty in the system, but I think that the Scottish Social Security System is really trying to address that and trying to give that assurance that it's there to support, not to try and hinder people in terms of their lives. I think that if you're looking at, particularly parents, when you look at the statistics, there are very few parents who, if we look at parents in couples, there are very few examples of where parents are not working, in the case where there's not a disability or ill health issue present. For single parents it's a bit high but it's very much linked to the age of their child and that very much links to the availability of childcare support, not just to preschool but rack around support out for school-age children as well. I think that's where the big barriers are. It's around treatments for long-term ill health, including mental health, and it's around removing barriers for parents. My feeling from looking at a lot of data on this, there are some examples of this but on the whole it's not the social security system that's holding people back from re-agaging in the lake. No, thank you. I understand that. Professor Chadda, if I could bring you in on this, I think that there is something interesting about the social security system not necessarily being a barrier but actually our employment market and the labour market being the barrier, so not enabling flexible work, not enabling part-time work, not enabling shorter work weeks, those kinds of things. I'm wondering what your comments are in this space because I think that we often talk about employment and the labour market separately to all the other support mechanisms around it and I'm trying to make the connections here. No, I'll just wait for a second for my mic to come up. This is an incredibly interesting discussion. The sense in which the support through social security alone might be providing a disincentive to work and I don't think that anyone in the discussion stage is arguing that, is a very simplistic way to think about why people may not be participating in the workforce. Clearly, there are a number of barriers for people working outside of their direct receipt of social security. It's pointed a few. The cost of childcare in the UK is considerably higher than we see in many of our trading partners. That's something that is a great issue for people wanting to get back into the labour force after having started a family. At the other end of the age spectrum, significant numbers of people later on in life are also caring for older parents or older family members, which can reduce their incentive to work if the replacement costs are higher. That then asks some really important questions of our schools, our health and social care systems. Can they be redesigned to facilitate support at both ends of the spectrum in a way that is much easier for people who are of working age? However, we want to define that. Clearly, as we hinted earlier on, we have a world in which those with higher levels of human capital can adapt to changing workplaces and continue to find employment. Of course, Scotland is a place with relatively speaking very high levels of human capital, but the world is always changing. We can supply education online and provide training support services. More of that ought to be available for people wanting to get back into work. One could imagine a world of grants or subsidies or whatever it might be to encourage that. Many areas in higher education and further education have developed ways of teaching online during Covid that could be redeployed to workforces now to help them to train themselves. Firms ought to be participating in that as well. Many firms are very positive to training employees or prospective employees, but we are still behind what we often see with many of our major trading partners in Germany or East Asia, where firms seem to want to participate in that process on a much more persistent basis. Of course, there are genuine hurdles to travel around the country at the moment, as my appearance online demonstrates. It is hard for people if they are re-entering work and they have to commute and train travellers to become more expensive. We have a very strained world in which a significant fraction of people can work from home, but many in certain industries cannot. At the same time, I think that all of those things are adding up to a set of rigidities that may not be helping higher levels of participation in the economy. I suppose that it argues for thinking it through very carefully and deciding upon a set of policy measures that would just make it easier for people to get into work and stay in work. As I have said, I have only listed a few here. I am sure that my colleagues have others that they would want to suggest, but you can see that it needs a whole set of interventions and some robust thinking. Okay, thank you. One last question, and it is on a different tack, if I may. Emma, I am coming back to you. In the press around published an article about the economic context for businesses in Scotland, there is something that struck me that the difference between the impact of the broader economic situation on SMEs compared to larger businesses turn over falling much more for SMEs than for larger businesses. What is your analysis of the long-term consequences for local economies and regional economies? Quite often, SMEs are the bedrock of those economies, and how do we ensure that that disproportionate negative impact on SMEs does not continue to drag? If it carries on in the same direction, the economic situation of our local economies is just going to get worse and worse. It is not just being the bedrock of local economies, but SMEs are the bedrock of the Scottish economy really when you look at it. It is incredibly important. It is really easy to understand why smaller businesses are struggling a bit more with some of the frictions that are going on, being able to less economies of scale and particularly dealing with issues around trade at the moment. We saw that in the financial crisis, and no doubt it is coming through again issues with being able to refinance on good terms, with larger firms being able to go to the market, and smaller firms relying more on financing from the financial sector itself. There are a lot of things in there. It goes without saying that, given the number of businesses in Scotland that are SMEs, it is incredibly important to ensure that they are able to withstand what is going on. I come back to the point that I made right at the beginning of it, that energy costs are just the most pressing issue that is coming through in our business monitor. Making sure that SMEs, particularly in the hospitality sector, have that certainty of what is going to happen to their energy costs come April, so that they can plan for it at least. That might mean that they have to reduce opening hours, but they have to be able to plan for it in order to be able to get through it. I think that that is the key thing. The other issue, which is really pressing for SMEs, is non-domestic rates and the impact of revaluation and what will be happening to reliefs, particularly in the next wee while. It is worth mentioning that we have a small business bonus scheme in Scotland, which takes a lot of businesses and small businesses out of non-domestic rates entirely, but it is not necessarily always the most consistent approach or the right approach in order to be giving reliefs purely based on the rateable value in non-domestic rate terms of those businesses, hospitality, which are valued in a slightly different way than other premises. I do feel that they are potentially a little bit disadvantaged by that system. The revaluation of NDR is necessary, but there are probably other reforms within that system to ensure that it is getting the most support out of those who really need it, which the business bonus scheme probably is not quite doing at the moment. Jamie Halcro Johnston, joined by John Mason. Thank you very much. Good morning to the panel. Just before I come to my main line of questioning, I just wanted to ask a number of my colleagues who have asked about the impact on leaving the EU on our economy and the impact that is going to have. I think that the general answer seems to be that we can see some impact, but it is quite hard to tell because of Covid and other aspects. Of course, one of the focuses of the Scottish Government at the moment is another referendum to leave the United Kingdom. We have all the potential questions around borders and debt levels and currency that have not been answered. We do not know in terms of, we have estimates on deficit, but we could not have agreed. I was just wondering—perhaps I could go to Professor Tadda first on that and then to Emma—how that kind of economic constitutional political uncertainty might impact, because we might find ourselves or certainly the intention of the Scottish Government would be out of the UK but also out of the EU for a number of years. I am just wondering how that might impact on business confidence and economic recovery. Well, thank you very much. To be clear, I think that I was trying to say that the Brexit process, where we had uncertainty about the future economic relations, as well as the political embryo that resulted, seems to us to have led to a drag on business investment, led to some atrophy in political decision making that affected businesses and as well as dragged on FDI. It also subsequently seems to have had an effect on our labour employment levels in this country, as well as shortages across many industries, as well as some reduction in the ability of businesses to plan in the medium to long run. All of that, we think, has reduced GDP output as measured by some four to six per cent in the very long run, so that is a kind of estimate of where we sit at. Now, if we entered into further political uncertainty of whatever form, whether it was Brexit or other referenda, that would then lead businesses and other people to introduce further clouds of uncertainty into their planning horizons, which, in the short run, would almost certainly detract from the kind of things that I have just talked about, business investment and the deployment of labour. That, of course, then becomes an issue for whatever political configuration we have in the future to address. The biggest tragedy that seems to me in the past six years is that, rather than the political framework's solving uncertainty, reducing it, providing answers, we have had a world in which the political firmament has been adding to it and making things worse often rather than better. What we would want from any settlement in the future is that there is sensible policymaking on an on-going basis that helps businesses, individuals and households deal with uncertainty. The classic example of which I am referring to are the events around the mini-budget in September and October, in which the uncertainty led to some devastating economic spillovers from which we are recovering, but have not yet fully recovered. I am saying that more uncertainty would be a problem, but if we ended up with the right set of policies, it could be offset substantially. The question is really interesting. We do find that, as I said, there can be big differences of opinion, both on the impact of Brexit and on the impact of a potential new referendum in Scotland. Our institute has not run specific analysis on the impact of Brexit recently, but I will very much agree with what the OBR and the National Institute said. There are impacts that are there in their forecasts, and, as I said, it is very hard to see a scenario where Brexit cannot have had that impact. In terms of an independence referendum on a move potentially to an independent Scotland, following through the fact that, if Brexit is having an impact, it would think that independent Scotland may run into similar issues, but it will depend on what settlement is reached in that scenario. We could have had a Brexit, which was much softer, as terminology is used often, but it did not put up the barriers that we are grappling with as an economy. That might have meant that there was not disruption to the economy in the same way, but the Brexit agreement that we have gone with at the moment has led to those impacts. The key issue would be what would the settlement be in independent Scotland? It would be very difficult to know that, because it would be a negotiation. Obviously, there is potential for disruption in the same way that we have seen with Brexit. If you say that the rest of the UK is a very strong trading partner, which would have impacts on Brexit potentially, but it all depends on what that negotiated settlement is. Since it is unavoidable, it is the uncertainty that it brings in businesses and the economy does not like uncertainty. However, that is inevitable. We have a constitutional debate and we are going to have uncertainty for a long while, yes, I imagine. Thanks very much. Susan, I do not know whether you want to add anything to that. I think that Emma just summed it up really well by saying that it depends. I think that we have got uncertainty now for a whole range of reasons. One of the things that I really notice when speaking to people about the timeframes on which decisions were being made—a really good example is that, when we were talking about European funding, that was made on a much longer-term timeframe than the kind of funding that is coming out of the UK Government now. We are down to three-year timeframes. Business and society need longer-term timeframes, so how do we work and give certainty over a longer period of time? Okay, thanks very much. Susan, if I can come and stay with you at stage, I suppose that the kind of issues that have been raised about what we want to see the Scottish Government do in terms of their competencies looking forward to help to deal with current economic uncertainty, cost of living crisis and the like. I am not going to say what would you want John Swinney to ask to do tomorrow, but can you outline some of the areas that you think that the Scottish Government—the competence of the Scottish Parliament—can act to deal with, as I say, some of the impact of the challenges that we face over the next few years? Thanks. If you look at the most urgent need that is coming through in our work on the understanding Scotland survey, the understanding Scotland survey tracks over time how people feel about the economy, their perceptions and their spending habits. It is giving us a really good threshold, and roughly in that there are about a third of people really struggling, so losing sleep over financial stress in their life, and that affects their ability to participate in the labour market, whether or not they are in work or not there at the moment. I think that there are other things that we can look at. We have a big problem with changing demographics and anaging population, but the focus has to be on how we stop more people from becoming absolute destitute, with the word that Professor Chatter used before. The Scottish child payment is going some way to help the parents—it was 35 per cent in the last survey that we were losing sleep. It is going to be harder as more people enter the challenging financial circumstances and that figures likely to rise. I think that there is a bit that I would like to come back on from the earlier discussion on the change in the labour market. If that is all right, I will squeeze it in. The voluntary decision of people in that late 50s, early 60s bracket to retire, if we could get some of those back into the labour market, that would be really good. The analysis done by the Institute of Fiscal Studies is really interesting, because lots of presumptions have been made about people's inactivity rates arising because of ill health, and their analysis challenges that. Some of that is when you look at the high vacancy rates and the skills development Scotland analysis of if your organisation is running with a high vacancy rate, the pressure on the rest of the employees rises. We should not underestimate that. That might be a driving factor in why some people are leaving. They are just deciding that working is too stressful. I am going to draw down on my pension, but if you think that a pension is needing to last for up to 30 years, maybe even longer, that might be a short-term gain or a long-term pain. We need to think about all those long-term things, as well as the short-term, when we are looking forward on the economy. Okay, thank you. If I can come to Emma on that as well, and if there are any specifics that you have particularly around how we get some people who are out of work, that out of the labour market back into it, that would be very helpful. Of course. It is interesting that the ill health issue is interesting, but I will come back to that in terms of Scottish competencies in a second. In terms of the voluntary leaving the labour market at the late 50s and early 60s, I hear what Susan is saying in terms of the long-run financial support. Obviously, if it is a voluntary decision and people feel that they have the financial ability to do that, it is quite difficult to think about what effective government policy could be to lure them back in, other than potentially it is very much in nature of the job market and their personal decisions of what they do there. However, in the area that the Government should and should be thinking about is getting some of the basics right. The basics in terms of what Susan talked about in terms of ensuring that the destitution is not the kind of scenario that we are looking at for many people. There are a lot of the powers around social security that are reserved to Westminster, but the Scottish Government does have powers to top up benefits, to create new benefits. It could be doing that, although it potentially leads time in terms of getting those systems set up and ready to deliver. However, the other area is very much around health and social care, in terms of understanding the linkages between those sectors and the issues that they are facing and the economy, and ensuring that there is the money in the system to keep those systems functioning well. It is not just about one thing. We hear a lot about issues with bed blocking, for example, as being the key thing that the Scottish Government is trying to do everything that it can to limit the issue of, but it is not just that. Obviously, it is symptomatic of huge issues around unpaid care, around the wellbeing of workers in the health and social care system. Of course, public sector pay comes into that. There are a huge range of issues that require quite deep thought and understanding about how those pressures—in the very short-term, anyway, over the winter—can be eased so that we do not have an issue with people not being able to work well because they are caught up with delays in the health and social care system. Thank you very much. Lastly, Professor Chadd, if you have anything to add to that, your thoughts would be very helpful. Thank you very much. I think that Susan Irma has been through all the things that I would have wanted to say. The extent to which the restitution at the very bottom is a concern and the extent to which it is concentrated in certain post-codes or regions of Scotland, and the extent to which the cost of living crisis is also affecting those at the very bottom, the income distribution. We have not expressed a concern today about the dwindling level of savings that households have. We have a world in which, following the Covid crisis, household savings have increased, but they are very much concentrated with households at the top of the income distribution. That means that households towards the bottom—some 11 million across the country—are going to find in the next 18 months or so that they do not have any savings left in a world in which they continue to have to pay higher energy and food bills. They do not have any savings to help them to offset those costs. They will need support through universal credit or the other forms of support that we have just been described, but it is important that we have measure on those in Scotland at a disaggregated level. At the level of the devolved nation, Scotland does not look off compared to many of the other regions in the UK, but, as it is everywhere else in the country, there is a lot of heterogeneity once you drill down to a more local level, and it is important that we are aware of that. One thing that was missed by a number of policy makers earlier this year is that, if you have not got any savings, you cannot ride shocks. You hit your budget constraint, and there is nothing more that you can do. Those of us who are more fortunate with savings can draw into them when shocks come along. If there are significant numbers of households without savings, they immediately either cannot pay their bills or have to go back to their provider for some form of credit agreement, potentially go to their landlord or their mortgage provider for forbearance. That is not always forthcoming. It may not be supported by legal frameworks or have to go to other forms of credit supply, which are incredibly problematic, as you would understand. There has to be work done there on getting the measure of this problem at quite a refined scale, if we could, so that we could address it in real time. We cannot wait a year for households who have no savings. It has to be done as quickly as possible. Thank you. I will take a brief supplementary from Gordon MacDonald and then John Mason. It was a question for Susan. You talked about the number of people that were retiring because changes in the labour market. I was just wondering what the impact of UK Government changes to pension regulations had on that.  It is fine, Susan. Broadcast will sort it out. Go ahead. I was just thinking that I hadn't un-muted, but it wasn't me. That's okay. The Institute of Physical Studies has got some really good work on this that I can share with the committee afterwards. They've also done a podcast on the people leaving work. For me, Emma picked up on earlier the question in a way that it's not a Government policy thing. It's almost down to the businesses that Gordon was talking about, how do businesses make themselves attractive when they've got gaps in their workforce? Older people might want to come back and work for them, and some of that might be changes to flexible working if people are balancing grandparent care with wanting to also work. That still being part of the labour market, there is a skilled proportion there that could come back to work if they wanted to, but we're storing up problems for the future. Professor Chatter mentioned the run-down in savings. People are also stopping paying into their pensions because they're worried about putting food on the table and heating their houses today. We've already got way below the rate of what's cluster, as the Resolution Foundation called it, the living pension. We need to think about how do we avoid a problem in 10 or 20 years' time because of the cost of living crisis now? That really does worry me about what's coming down the line for people who are on the bread line now. Thank you so much, convener, and thanks for the opportunity to be here today in place of Colin Beattie. Energy has clearly been mentioned a few times, and I just wanted to spend a little bit more time on that. I think that the point has been made by ourselves and others that the energy prices, which is largely out with the UK's control, have gas and so on have gone up dramatically. That is fuelled inflation and that is damaging the economy. I think that some of the public wonder, are we doing the energy the best way we can be doing it? As I understand it, Scotland produces five times as much gas as we use. We are also producing all this renewable electricity, which I think is meant to be in the long run, and yet people are not seeing that. Is that just something inevitable that we have to accept, or could we be doing energy differently to support the economy better? Maybe I could start with Susan Murray. I recognise that none of the panellists are here as experts on energy, but in broader terms, if you wish to answer the question, please go ahead. I am not an expert in energy. I am aware of the discussion about, over the years, how off-gen regulates the market has been subject to much discussion, and it feels like the energy crisis has brought that into sharp focus. I think that the fact that we are still looking at prices fixed on gas rates when there is so much production now done by renewables is something that needs to be fixed reasonably quickly. I think that the other thing for Scotland has had many stories over the years of people wanting to do micro renewable schemes and not able to get grid connection, and I think that that has held back adoption where we could actually have even more more generation. I do not want to comment more than that, because I am not an expert in energy policy. Yes, my apologies. I realised that I was not speaking to energy experts, neither am I, of course. Do either of the other two want to come in on that, Professor Chadda? I think that, just briefly, I had to certainly say that I am not an energy expert, but the world in which non-renewable energy sources are going up in price provides an important incentive for furthering our move to renewables, as well as thinking about energy security. Our ability to have inventories of energy in this country has been undermined in the last couple of decades, and I think that there is a sense in which we need to think very carefully about how we provide security of energy supply. The direct question of the increase in energy prices is also an interesting question, because we would want the higher prices to lead to people being more careful in their use of energy and realising that it is a scarce resource, but that said, that is a very damaging set of prices for people at the bottom of the income distribution. We have been arguing for some time for a very different approach than just fixing the price per unit, which in principle is more helpful to those who use more energy, which tend to be those people at the top of the income distribution rather than those at the bottom. I should say, of course, that many people at the bottom of the distribution do use a lot of energy and may be living in older housing stock. That requires insulation or support for making it more energy efficient in its usage. That, of course, could also have been undertaken with direct interventions to help Boris family. We generally regret that the energy price guarantee as outlined was not addressing those issues as well. That would have been less damaging to the physical position but also provided more support to poorer households. Again, the issue has raised a number of questions that good government policy ought to be addressing. I think that we are in the area of thinking about those now as a result. If I could come to Emma Cungrieff, what Professor Chadd has just touched on is the kind of support that I wanted to go to next. What kind of support should either the UK or the Scottish Government potentially be giving, and I suppose particularly businesses, because the kind of support that we have seen so far—I mean that I am getting £400, I am ridiculously well paid. Why am I getting £400? It just seems crazy, and there are other people who are really struggling. The bigger picture and also the smaller, local picture? Yes, thanks. I think that what you have touched on is important, because there are many reasons why you would want to better target support for energy prices. People are receiving income to help energy costs, if they might not need it, and other people are needing a lot more. Obviously, when it comes to the feasibility of doing support systems, a universal approach can often be easier. I would not necessarily say cheaper, because given that there is something that we are thinking about, I would not necessarily say that. However, there are lots of factors that policy makers need to weigh against each other when deciding what the right way to get support out to people, so that it does get to those who need it, but the consequence of that might be that it also goes to some people who do not, but that might be the most efficient way of doing support. What we have heard from the UK Government most recently is that it is looking at a different approach from April that is not quite so universal. It roared back on saying that that is the support that is in the system at the moment, and the energy price cap will continue beyond April. Again, we will wait and see what that will be. There is actually some very interesting interaction with the inflation measure, depending on what type of support package the Government puts out there, the way that the system at the moment does not count towards inflation, but a more targeted support might actually count towards the inflation measure, and that has implications for inflation expectations and all of that kind of thing, so there are unintended consequences potentially there as well. There is not a simple answer in the frame. There are a lot of different factors that we are trying to lay up to work out what the most efficient and effective support system will be, but we need to know that what that system is going to be fairly soon, as I previously said, in order to enable people to plan for beyond April. If I could just push you a little bit further on that, especially as far as businesses are concerned, because Professor Chadda made the point that, on the one hand, we actually want people to become more efficient, and that would be true if businesses as well do not use energy that they do not need to be using, yet some clearly do need to use a lot of energy for a whole variety of reasons. Have you any thoughts about how we could target businesses and try to get that balance right? Other than being able to analyse and take an evidence-based approach to where sport is most required in the system, that is what we would be expecting to be happening, rather than it necessarily just to be a blanket support. I do not think that I can comment to more specifically on that, I am afraid. Susan Murray, would you like to come back in on where support should be targeted on energy prices and so on? No, I think that it is not an area that we have done specific work on. When you said though about not needing your energy grant, can I use the opportunity to mention the Give 400 campaign? I do not know if anyone is aware of that, but there is a movement in Scotland for people that do not need their energy support package to donate it to charitable causes. We have seen in the understanding Scotland survey that charities are likely to lose 40 per cent of their donations this year, so please do donate it if you do not need it. Emma's points on targeting and going back to Gordon's initial question on businesses. It could be how the decisions and choices that are made around who is supported and who is not might make the difference between survival or not. We will see businesses closing as a result of energy's costs. Thank you for that answer, and thank you for your suggestion that I give my £400 away. My colleagues are all pointing at me. We are now beyond the time that we have estimated. If the witnesses are happy to continue for 10 minutes or so, I will bring in Michelle Thomson. I understand that Professor Chadd I made referred back to the questions from John Mason, but I will hand over to Michelle. I think that you wanted to come in, Professor Chadd. You can add it to the response to Michelle, if you wish. Perhaps, because I am aware of time, I appreciate you giving up your time. I will just direct my final question to Professor Chadd. When we were talking earlier about uncertainty, we have talked about how you disaggregate data, and so on, my colleagues touched on that. The past, arguably, is a good predictor of the future. Given that this session is an overview of the current macroeconomic climate, I thought that it was worth pointing out that some of the stats around the UK since 1999, only four of the 12 small advanced economies had a GDP per capita higher than the UK. By 2019, it was the 11 out of 12 of them. Even since the economic crisis of the UK had matched the economic growth rates of other large economies, the UK economy had been 4.4 per cent larger. If it matched small advanced economies, it would have been 7.7 per cent larger. That gives us considerable certainty, because we can look at the past. My question to you is, given that those economic stats, to what extent can we be certain of continued decline if the past is a good predictor to the future? To what extent are we really a hipster or an otherwise economy? Thank you very much. The relative decline of the UK economy has been in train for well over 100 years. It was the largest economy in the world in the late part of the 19th century, so we are used to that relative decline, but you are right to point out that it has been more marked in this century than we otherwise would have wanted. We have fallen further behind what economists call the productivity frontier, which you can imagine is a set of countries that are moving very quickly ahead with productivity improvements. We put so much weight on productivity because it tells you how much return you get for every hour that you work. It is a very good way of summarising wellbeing. If you are getting more of a return for every hour that you are working, you can have more leisure or more consumption as a result of that. That is a secular trend that is associated with a large number of factors, as you would expect from the whole of the system. An economy that was arguably too centred on the financial circulation of capital out of London and the south-east is inappropriately prepared in terms of human capital and other skills in the economy for a 21st-century economy. Infrastructure absences across wide parts of the country are a lack of internationally competitive firms sighted outside of London and the south-east in Scotland, providing local pools of demand that would bring in people with high levels of human capital and, on an associated basis, raise wages of people further down the skill level in those areas. There is a whole range of things that have required attention from successive Governments that have not been addressed, but I think are the main reasons for that rather larger fall in relative decline than we might have anticipated a quarter of a century ago. The result of all that view and analysis is that it cannot be addressed very quickly, certainly not in a statement made tomorrow or in the next year or two. There needs to be a persistent need by revamping of our institutions and the objectives of our policymakers to drive us into a better space. It is not going to be easy. It is going to require a consistent approach that we have not had for quite some time. That is why I am chairing the Productivity Commission to try to understand how we can bring about policies to which political leaders can not only commit to now but future political leaders will commit to as well. A classic problem that we have in the UK is that the horizon of politicians in Westminster is determined by the next election, which is some two years away. However, the problems that we have outlined are ones that have developed over a quarter of a century or more, so we need much longer horizons in planning and thinking. That is where we desperately need to go as a country. The move to more powers for devolved nations is part of the answer, it seems to me, but we have not arrived at a full answer to deal with the problems that we face. I mean, there are multiple further questions, but I will leave them just now in the interests of time. Thank you very much. I would like to thank all three witnesses. It was not the chearest note to end on, but it has been a very productive session. We do appreciate the time that you have given us this morning, and it will help to inform our work in the coming weeks. I will now move the meeting into private session.


Hi everybody. Today I'm going to talk to you about MediZar project. I've been working on the last few months at CryptoNet. I'm going to talk about fresh on-network and on-chain data management. So let's derive why. What is MediZar? MediZar, I'd like to describe it as a toolbox to do many things. To do programmatic essence control, which is the first application we're going to focus on on-chain time encryption. One is big on the menu of the stuff. Basically, you can think of it as MediZar allows smart contract or any application that we're focusing on the central application today to all the private key via a fresh on-network. We have a demo about access control we're going to showcase later on on Gurly, Ethereum. And let's dive right in what it means all this. So let's take a step back and what is the problem exactly? Like right now, in terms of private information, there's nothing private basically on-chain. So everything you send is kind of public. And so the smart contract act as a third party, but it cannot hold anything private to its own. So it's a complete public, state public third party. And so that means the smart contract cannot sign or perform any kind of operation on-chain. It's just a testing and running some logic, but not logic, which includes private information. What do we want to do if we could add the possibility of having a smart contract which has the private key, then we could do many things. We could do, for example, one thing, but which are the focus of this talk by now is programmatic access control. So for example, you can access to this document if you show you have this entity during this event. Or I will give this access to this mailing list to all ads protocol.ai user or anything, any condition you can actually prove in a smart contract or in other ways. So general concept of on-chain balls. And so how does this work in the context of Medusa? So Medusa is kind of a network by itself, okay? A network of nodes. It's a threshold network. So that means there's some kind of assumptions here about the honesty of the network. So we need more than 50% can be any threshold. To be honest, in this case, the network will hold the key without anybody knowing it. So no nodes of Medusa will know the key and nobody will know the key, but yet the smart contract can use it. It's very, and when you integrate this design into the blockchain mindsets, then you kind of have this protocol-like design, kind of similar to chaining for those we know. So when the smart contract wants to, for example, let's say one operation you can do with your private key is decrypt something. So the smart contract can see a decryption request to the Medusa network, and then second, the Medusa network will decrypt it and push back the plain text. Okay, so you really have to think about the Medusa as an extension of the smart contract in this way. And so what you can do with it now is you can do things like problematic access control in a very easy manner. So basically imagine plenty of applications that needs to have access control, like for example, document sharing or private mailing list or even the music platform, whatever. They delegate, let's say, the key to Medusa in some sense. They don't do anything, but when they use Medusa, it's kind of similar to, it's behind the key, but they get to the Medusa and they ask the Medusa network to operate on their behalf. And so any smart contract in the Medusa, there's no registration. You just say, hey, Medusa decrypt this thing. And that's what it's like one call. There are kind of two modes about Medusa. Like you can have a global depiction where the Medusa network completely decrypt the cyberdex and push it on chain. So now you are rebuilding the message. But this can be useful for applications like, I don't know, bets or auctions. Speaking of this, but you can also, and this is the focus of the demo that we have today, about focusing on that re-encrypting cyberdex. So if this is what we need for access control management, like the document sharing, we request that you, that the Medusa network decrypts this document explicitly for Bob. So it requests a decryption for Bob and the Medusa network is decrypting it with just re-encrypt the document towards Bob. So how does it work? Let's say from end to end as the user flow. So let's say imagine we have Alice, which has new super top secret documents. First thing it does is encrypting it. Okay, right? So now it has a cybertext. Second thing it does, Alice will submit the document or the key of the decryption it will submit the encrypted key that lead to the encrypting of the documents and it will lead to an event on Medusa. So now the Medusa network is aware, but there is this encryption document somewhere, but it doesn't do anything yet, right? And later on, it can be one week, one month, one year afterwards. Then Bob comes in and say, hey, I want to read these documents. So now it goes to document sharing smart contract and say, hey, I want to read. And now the document sharing platform needs to say, okay, is Bob operational? And this is custom logic. Anybody could code his own custom logic. It could be if Bob is more than 18 years old, or if he's taken enough if or somewhere, like it can be anything. And then if the Bob has the right to access the document, then the woman sharing platform will ask the decryption, the re-encryption to add to the Medusa network. And so now the Medusa network reads everything, will read the decryption request and the submission event formats. And it will re-encrypt. So it will never decrypt the site for text. At no point in time, the encryption will be built. It will be read. And so then once that does meet internally, it will push the re-encryption on-chain to the Medusa smart contract, which will push it to the document sharing. And then Bob will say, oh, okay, my re-encryption is ready. He downloads it on the browser, on his common line interface, whatever. And then he do a local decryption. So then he can read the document by himself, locally on his computer. And that's kind of the whole workflow we've been working on right now on these Medusa projects. Right now, there's only me for this last month. And we just hired somebody that will help me on the smart contract on the backend side. Jonathan is someone. And then we have a working program concept codes. You can check out the code, which is not completely public yet. So you need to ask me first if you want to have invites. It's based on Rust for all the backend and the 3DT right now because we deployed the proof-and-concept code on Gurly. And the nodes communicate barely P2P. We were running several pretty big stuff. We have a demo, which I'm going to show you later. On the future, we want to expand a little bit, so we use it. So like I said at the beginning, there is a test control, but we can do, we'll see when it has begun. We can do time encryption, where upon any condition or witness encryption, general witness encryption, or upon any condition, then we reveal something. We can also do a privacy on top of what are the conditions for somebody to be able to ask the encryption. This could be private as well. So you could not reveal that your name is bothered by your more than it's the other. But if anybody could verify, but at least you are more than it's the other than you are somebody. And MPC could help there. And also we are trying to have some kind of research acts on the extending and the scalability of the basic cryptographic primitive that we use, which is special cryptography. And as such, at least we have the first iteration. We made the first prototype code about DKG. So the underlying cryptographic primitive, which can run with under the nodes, which is not familiar now, and will lead to maybe a prediction thing later on, but we need to decide where we're going to go. And so this is a very brewing project. And if you're interested to hear more and participate or there's plenty of things to do, so don't hesitate to contact me. And now I'm going to show you a quick demo. This is the ACL contract, the Access Control List contract, where it lists only reader and writer roles. I write a text, a cycle, something. It encrypts a whole other chain. And there's a reader role I can show you later that will try to decrypt, ask to decrypt. And this is the Medizar contract. So let's say I want to type a small secret here. Okay, so I play with my Metamask. Well, I can sure it's good. This is on really if you're on Testnet. Now I will switch to a reader role. So I'm not just switching kills. And now I can read. I can read all the side products. These are all the side products, submission times, submission activities. And now I will ask to decrypt this one. I just made one here, you see. I will ask to decrypt this one. So again, it's a transaction by the bottom chain. I asked to decrypt. So my keys is white listed already on the Access Control List smart contract. So I can already read anything at once. This is a very basic demo. But the idea is that anybody can code his own rules. Like there's no, it's just a major size, just a toolbox for people to use on tablets. And now we submitted the transaction and now we're waiting for the order of results. And in the meantime, because it takes a little bit of time because we are on girly. I can show you that there are four participants in the network right now. So there have been four nodes that are holding the private key and major data. These are all the address addresses. And there is a distributed public key to where to add with China groups. And here, I signed this certificate of Uber vanilla and that's it. So you see I can decrypt from the border as well. And that's it for me. Thank you everyone.