SCOTLAND’S economy stands at a crossroads, confronted with a series of stark, intertwined crises. How the country responds to such challenges depends on the decisions we make, both now and in the future.

The 2008 Global Financial ­Crisis ­exposed underlying fragilities ­embedded in Scotland’s economic model, and the post-crisis ­austerity programme undercut public ­services and deepened structural inequalities. The ­Covid-19 ­pandemic gave way to a rapid, prolonged ­demobilisation of vast swaths of economic activity, wreaking havoc on the labour market and triggering the deepest recession on record.

While the virus itself does not discriminate, the current economic model does, and the pandemic both exposed and deepened long-standing injustices.

Compounding this web of challenges is the ­emerging cost of living crisis

The UK inflation rate has soared to 10.1%, generating a profound cost of ­living emergency. Household fuel bills are ­increasingly unmanageable, particularly in rural ­areas. Financial Fairness Trust research uncovered that 53% of working-age households are finding it harder to keep their home warm and 46% are eating lower-quality food.

While households grapple with unaffordable costs to meet basic needs, oil and gas giants and large ­energy companies are announcing eye-watering ­profits.

The cost of living crisis thus highlights the sheer cost and volatility embedded in the ­continued reliance on ­fossil fuels and a privatised energy ­market, and is also emblematic of the interconnected nature between climate breakdown and deep-rooted inequalities.

What are the key challenges facing Scotland’s economy?

To understand how best to tackle these crises, the nature of key enduring and emerging challenges needs to be understood.

Scotland’s economy boasts a number of key strengths, but despite areas of progress harnessed through devolved powers, it also faces both long-standing and emerging issues. One such area that falls under both of these categories is stagnating living standards.

The sharp inflation increases also caused earnings to drop over the last year, and real terms earnings in Scotland are not expected to rise higher than 2016 levels until at least 2026/27.

­Poorer households, who tend to spend a higher ­proportion of their income on energy, food and fuel, are ­disproportionately impacted by the cost of ­living ­crisis, while the highest-income households have been relatively insulated.

Today, around one in five working-age adults in Scotland live in relative poverty after housing costs, and groups like single mothers, young people and those from ethnic minority backgrounds are all more likely to live in relative poverty.

A key driver of this is low-paid work, which is ­particularly ­prevalent in sectors like retail, hospitality and social care, while zero-hour contracts are now at a record high in Scotland.

Alongside this is the impact of social security cuts introduced by the UK Government following the ­financial crisis, further squeezing household ­incomes. Despite progress through the Scottish ­Government’s new benefits, the combined impact of low pay, social security cuts, and rising prices have left many facing financial hardship.

A key determinant of living standards is ­productivity. While Scotland’s productivity has improved compared to the UK overall since devolution, it still lags ­behind many European ­neighbours. Linked to this is persistently low ­levels of ­investment compared to other ­advanced economies.

The drivers of low investment are multifaceted, including a banking ­sector that has retreated from funding the real economy, corporate ­short-termism and trade frictions. The scale and ­urgency of the crises we face requires a step-change in both public and private investment.

Recent decades have also seen a ­dramatic decline in manufacturing and a steep rise in the service-based ­economy, as worker voice and power has been ­successively watered down.

As we ­navigate the climate crisis, a key ­challenge will be to reinvigorate the ­industrial base through proactive steps to strengthen manufacturing ­capabilities and domestic supply chains, ensuring this translates into well-paid, secure, ­unionised green jobs.

The decline of manufacturing has been accompanied by the rise of ­extractive business models.

From energy and rail to housing and social care, many of our most essential services have become ­engines of wealth extraction – taking wealth away from workers and ­redistributing it ­upwards to shareholders. Tackling this will require scaling up more democratic forms of ownership and governance, learning from successful examples such as Scottish Water.

Adding to these economic ­challenges are demographic challenges. Like many ­advanced economies, Scotland’s ­population is getting older, with knock-on implications for areas like income from taxes.

Long-term and emerging economic challenges have contributed in ­varying ways to driving inequality in ­Scotland, which has several dimensions. ­Income ­inequality in Scotland remains ­relatively high compared to many European ­countries.

This is partly because the structure of Scotland’s economy delivers a highly unequal distribution of income before government redistribution takes place. But it is also because Scotland’s tax and benefit system is not as ­redistributive as it is in countries like Finland and ­Germany.

Another important measure of income inequality relates to the gender pay gap, which increased again in recent years and varies across the income distribution and in occupations, levels of seniority and age groups.

Wealth inequality in Scotland is more severe than income inequality, with the wealthiest 2% of households owning 18% of all wealth. Higher-income households, pensioner couples, and homeowners have benefitted the most from rising ­asset ­prices. Low-income households – ­particularly groups like lone parents, ­single working-age adult households, ­people from ethnic minority backgrounds and renters – are more likely to have less wealth.

Regional economic disparities also ­remain large, and in some instances have grown wider. In Edinburgh, for instance, GVA per head is nearly 2.5 times higher than in East and North Ayrshire.

These disparities are inherently connected to long-term issues like manufacturing ­decline, a concentrated pattern of land ownership, and low investment.

Compounding regional inequalities are new challenges.

The Highlands and Islands, for instance, is simultaneously dealing with sharp land price rises, an acute rural housing crisis driven in no small part by an unprecedented increase in holiday homes and second homes, and disproportionately unaffordable fuel costs.

Intrinsically linked to inequalities, the causes and distributional consequences of climate and environmental ­breakdown are evenly felt, with those that have ­contributed the least both within and ­between countries and global regions, facing the most adverse consequences of it.

Despite this, it is predicted that the world is on track to experience new ­record temperatures in the next five years, rising above the target set of 1.5 degrees above pre-industrial levels.

As a major oil and gas producer, Scotland’s contribution to climate and ­environmental breakdown is significant and there is therefore an ­enhanced onus on the country to lead by example through a rapid and just transition.

The Scottish Government has ­committed to becoming net zero by 2045, and aims to reduce emissions by 75% by 2030. Since 1990, greenhouse gas ­emissions in Scotland have fallen by 51%.

Despite this clear progress, the ­Committee on Climate Change notes that Scotland “lacks a clear delivery plan and has not offered a coherent explanation for how its policies will achieve ­Scotland’s bold emissions reduction targets.”

Averting climate and environmental breakdown necessitates systemic shifts in key levers across economic policy.

There are too many areas to cover here, and already a great deal of work being done by civil society organisations and trade unions, from Living Rent’s ­campaign to retrofit homes, to Scottish Trade ­Union Congress (STUC) demands for a ­coherent low-carbon industrial ­strategy, and Friends of the Earth Scotland ­championing offshore workers’ priorities in the transition.

Given the recent shifts in Scotland’s rural land market, and the way in which it has crystallised the shortcomings of a net zero approach versus a just transition, it is important to draw attention to land and nature.

WHILE reducing carbon emissions is critical, a just transition must also seek to restore Scotland’s natural environment. Tackling the climate crisis and restoring nature are inherently interconnected.

Scotland has a large rural land area which, if managed effectively, can help ­deliver a just transition through ­greenhouse gas removal. Despite ­progress through land reform ­legislation, Scotland’s highly concentrated land ­ownership pattern, generous tax and ­subsidy regime for land owners, and lightly regulated land market have made it particularly attractive to those seeking to purchase land for carbon offsetting purposes.

The emerging value associated with Scotland’s natural capital potential ­therefore raises vital questions about how Scotland’s natural assets should be owned and managed; how nature ­restoration activities should be financed, and how the associated economic ­benefits should be distributed.

On current trajectories, there is a risk that the financial rewards from Scotland’s “natural capital” will end up flowing to a small number of absentee landowners and investors, rather than generating prosperity for local communities.

What goals should we seek to achieve?

Given the scale and complexity of these compounding challenges, at this critical juncture, maintaining the status quo would not be a neutral act – it would be an active decision to deepen our ­multiple crises.

The systematic changes needed to ­comprehensively rewire the economy rest at all levels of decisionmaking. A number of key economic levers ­remain reserved to the UK Government, while crucial ­issues such as trade are ­governed by ­multilateral bodies.

But at this ­moment of economic crises, it is clear Scotland needs to ­elevate its level of ­ambition, ­recognising that it is in everyone’s ­interest to ­maximise the potential of the Scottish ­Parliament, ­enabling it to lead by ­example by ­implementing an ambitious, bold policy agenda.

To do so we must acknowledge that Scotland cannot overcome the ­intertwined challenges it faces by making minor tweaks to the status quo. Instead, we must embrace bold ideas to transform Scotland’s economy.

Last week we launched Future ­Economy Scotland, a non-partisan think tank that aims to create a new economy that is democratic, sustainable and just. We aim to strengthen the evidence base for change by developing transformative policies that promote three key goals to: l Decarbonise the economy.

We need to rapidly transition to a net zero economy, but how we do so matters. The scars of deindustrialisation – still visible decades on – shows that we can’t afford to repeat mistakes of the past. Our work will aim to rapidly decarbonise Scotland’s economy in a way that heals inequalities, delivers well-paid, green jobs and secures a sustainable future for communities.

Not only is this necessary for the planet, it’s also popular.

Democratise the economy. While the creation of the Scottish Parliament brought political power closer to the people, economic power remains concentrated in the hands of the few that own and control our most important assets. Our work will seek to democratise the economy by giving people and local communities a greater stake and a say over the assets and decisions affecting their lives.

Decommodify the economy. Eradicating poverty and insecurity means ensuring that everyone’s basic needs are met. But the erosion of public services and the rise of extractive business models have left many without basic security and dignity. Our work will aim to protect and expand Scotland’s public services, while replacing extractive business models with more democratic forms of ownership and governance.

A time of big challenges requires bold solutions. We hope that Future Economy Scotland can strengthen the movement working to build a fairer, more ­democratic and more sustainable economy.