Rain Newton-Smith, chief executive of the Confederation of British Industry, reveals that no Scottish business she has spoken to recently has brought up the issue of independence.

In an interview with The Herald, she also gives her views on the big issues of the UK’s relationship with Europe and immigration, and the importance of Scotland’s oil and gas sector.

 

Is the Scottish independence issue less or more of a focus for businesses north of the Border than it was a year ago/ two years ago, or is it the same?   

Honestly, no Scottish business I have spoken to recently has raised the issue of independence. What they are talking about is how to get the economy growing, how to upskill their workforce, how they can invest in and grow their business. They’re focused on the Chancellor’s Autumn Budget and they’re looking ahead to the Scottish Budget later in the year, to see how both fiscal moments affect our ability to grow the economy. That’s the priority right now. 

To what extent do you believe Brexit has been and is affecting companies - in terms of skills and labour availability and exports and imports - and the Scottish and broader UK economies?  

I don’t think we can ignore the impact of Brexit. Alongside the pandemic and the conflict in Ukraine – and the resulting energy crisis – it’s one of the big “shocks” our economy has faced in recent years. 

Take access to people and skills, something absolutely fundamental to economic growth. I’ve heard from companies caught at the intersection of these crises. Brexit didn't require EU workers to leave, but many did during the pandemic and couldn't come back.  

The labour shortages that businesses are facing now are more about demographic change than anything else. Our population is growing, but our workforce isn't. This is a long-term challenge and businesses are pragmatic. They see where public attitudes are with respect to immigration levels, so they know we need to look at a range of solutions to deliver the workforce that supports growth.  

Whether that involves investing in technology to boost productivity, investing in workers' skills to use that technology well, or the importance of partnerships between business and government to remove barriers to work, like ill-health or the cost and availability of care services, that have increased economic inactivity. 

 

What changes to the UK’s current relationship with the European Union would help? If any, which of these are likely under the new Government?   

The business leaders I speak to really do see this as an important opportunity to reset our relationship with the EU. This isn’t a case of new government, let’s reverse Brexit.  

Look, business knows a return to the single market, customs union, freedom of movement, isn’t on the table. But that doesn’t mean things can’t get better. It doesn’t mean that we can’t address the issues that are slowing trade, increasing business costs and frustrating investment.  

The Trade and Cooperation Agreement is set to be reviewed in 2026. We need to take a good look at what is working and what isn’t working now, so we are ready for that moment. And business is best placed to provide that on the ground input.  

In terms of what can be improved. Let’s look at regulatory co-operation, mutual recognition agreements, data adequacy, youth mobility and reducing customs and administrative burdens. That would provide a big boost to trade and growth.  

The important thing is to collect that evidence now and do the diplomatic hard yards early. That will put us in a strong position when it comes to the TCA review. 

 

Are any changes needed to the current immigration arrangements to enable Scottish and UK economic growth? If any, what are these and what is the likelihood of them happening?   

You don’t have to go too far in Scotland to see businesses struggling for people. It’s something our members talk about every day, and I know “help wanted” signs have become really commonplace in hotels, bars, restaurants and tourism businesses across the Highlands and Islands.   

Personally, my view is that we need to take a clear-eyed look at the UK immigration system and have an honest conversation about the relationship between immigration, growth and living standards. Business investment is key to the productivity needed to pay for higher wages and living standards, but acute labour shortages force businesses to think short-term and make it harder to invest.  

We should be doing all we can to improve the domestic labour supply by supporting people with their health and caring responsibilities and building a dynamic and flexible education and skills system that’s better tailored to the needs of modern businesses. However, I don't think we can achieve sustainable growth in Scotland or across the UK without resetting how we think about immigration. 

How do you view Labour’s policies on the North Sea oil and gas sector?  

Firstly, I think it’s important to say how important the oil and gas sector is to the Scottish economy - and to the UK overall. Not only are those firms amazing at what they do, it’s those very same companies that are leading the charge investing in new decarbonisation technologies like CCUS and hydrogen. And that’s really important. All of the experts tell us that oil and gas will play a continued role in our economy into the 2030s and that it is essential to support our transition. It’s not a case of all oil and gas production being switched off – that isn’t possible or desirable. The UK’s North Sea Transition Deal represents a good model for managing the UK’s declining resources in the North Sea and that’s something that is backed by businesses.  

Given the next five years will also be vital for UK energy security, we need to keep firmly focused on bringing investment into the sector. Sector-specific taxes – windfall or otherwise – would do the opposite of that. We don’t want those firms that are crucial to driving net zero investment to suddenly stop investing in renewable technologies or decarbonising their assets. 

On GB Energy, we absolutely share the UK Government’s ambitions. Bolstering energy security and increasing infrastructure investment are rightly key priorities in the transition towards greater clean power generation. Done correctly, GB Energy can accelerate offshore wind and act as a catalyst for investment in new green technologies. But businesses and investors are looking for clarity on how it will operate, what role it will play in the market, and how it will interact with the National Wealth Fund. For Scotland, the hope is that basing GB Energy in the hub of the UK energy sector can create local jobs and allow the new entity to benefit from a wealth of energy expertise. 

 

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What are the main challenges facing the Scottish and broader UK economies?  

I’m going to sound like a broken record here, but the answer really is growth. Whether you’re looking at the whole of the UK, or just Scotland on its own, growth isn’t where we need it to be. It’s a massive handbrake on our economic ambitions. 

You’ve heard the Chancellor, and you’ve heard Scotland’s Economy Secretary both say similar things about tightening belts. That’s because we just don’t have the growth we need to fund major investments right now, and that has an impact on our ability to improve public services. Less than 1% growth is pretty anaemic, and just isn’t enough to raise living standards.  

If that’s the bad news, then the good news is that things are starting to turn the corner. Inflation has fallen, and further cuts in interest rate cuts going forward should start to help households and businesses. After a really tough few years with Brexit, Covid, the conflict in Ukraine and the resulting energy crisis, that’s certainly welcome – everyone is overdue a bit of respite. While we’re not getting ahead of ourselves, this is definitely the early “cautious optimism” phase, there are positive signs of an economy picking up steam.   

In terms of the major challenges, I think we’re seeing a lot of the same things in Scotland as we are across the rest of the UK. Planning systems that are too slow, too cumbersome and too bureaucratic are holding back vast swathes of private investment. That’s why it’s so encouraging to see both the UK and Scottish governments make commitments to address that.   

 

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Helping firms to get the people and skills they need to grow and invest is a perennial problem, and again we’re seeing both governments make warm noises about taking action in this area – whether that’s through tackling economic inactivity or reforming our education and skills systems. The First Minister announced a new approach to skills in the Programme for Government. That’s something we absolutely back. But given the acuteness of skills shortages in Scotland, firms will want to see detail and timeframes for delivery. Reform of the Apprenticeship Levy is another elephant in the room and is something businesses in Scotland, and across the UK, have long been calling for. 

 Does the US presidential election outcome have major implications for the Scottish and broader UK economies? If so, what are these?  

Regardless of who occupies the White House, trade with the US is hugely important to the UK and Scottish economies. The biggest concern for firms is whether the US is going to be a beacon of free trade, or a bastion of protectionism. For the success of the global economy, we absolutely need the former. 

What do you see as the main strengths and weaknesses of the Scottish economy?  

Being in Scotland this week, and talking to Scottish businesses, it’s clear there’s a real buzz around what Scotland can do in the energy transition space. As the energy capital of the UK, it already has such a wealth of experience and expertise in energy generation, not just oil and gas, but in terms of delivering major projects like Acorn and ScotWind.  

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Not only is Scotland one of the UK’s top destinations for net zero infrastructure projects, that expertise is now being exported around the world. Wind turbines are now Scotland’s third-biggest export, and that’s up 25% in just the last few years. 

Speaking of exports, we all know the reputation that Scottish produce has around the world. While whisky remains the jewel in the crown, we know that Scottish distilleries and craft producers are diversifying like never before, with gins, rums and other spirits all entering UK and global markets. From craft beer to salmon to textiles, demand for high-quality Scottish produce is absolutely thriving. 

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We also have to talk about Scotland’s knowledge economy. Scotland has a highly educated population, with 50% of the working-age population holding a higher education certificate or above. That’s well above the UK average and it’s a reason why global firms see Scotland as an attractive place to base their operations, and why we can continue to support an amazing range of diverse sectors, from space and life sciences to tourism and professional services. 

But the Scottish economy also has some pretty noted disadvantages – including a longstanding problem of low productivity. Our Productivity Index highlighted weak business investment, decreasing R&D spend and low levels of innovation and technology adoption as real concerns. 

Adding to this, the demographic trends are pretty worrying. They show that Scotland has a rapidly ageing population, with more people set to enter retirement than enter the workforce. That’s a real policy challenge and one we need the UK and Scottish governments to get on top of.  

Tied to that, economic inactivity is higher in Scotland than the UK average. The Scottish productivity index found an increase in sickness absence and inactivity due to ill health over the last year. That’s why we need to look at how we can incentivise investment in workplace health initiatives – that’s a key CBI priority ahead of the UK and Scottish budgets. 

 

How do you see the interest-rate outlook?   

The MPC made their first cut to interest rates in August. While that was absolutely in line with our own forecast, we know the decision was on a knife edge.   

Nonetheless, it should mark the start of a rate cutting cycle, and we anticipate at least one more 25 [basis] point cut this year. Rates will be reduced gradually, likely until they reach around 3.5% by end of 2025 or into early 2026.  

While that is good news for households and businesses, we can’t afford to get too far ahead of ourselves. Inflationary pressures have been stubbornly persistent, and there's only limited evidence out there to suggest that has been defeated. 

 

Has the Bank of England’s Monetary Policy Committee taken the optimal decisions on interest rates in recent years?  

We have to put the MPC’s decision-making within the context of some pretty major shocks to the global economy, from Covid-19 and the conflict in Ukraine, to lingering effects of Brexit.  

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Even if the MPC had correctly predicted the invasion of Ukraine and subsequent spike in energy prices, they still would have had to sharply raise interest rates earlier in 2021. I think the comments Andrew Bailey made in Jackson Hole were pretty instructive on this. He warned that such action would probably have caused a “deep recession and a steep rise in unemployment” when the country was only just starting to recover from the height of the Covid-19 pandemic.  

Overall, I think that the MPC have been right to be cautious, and to continue to err on the side of caution. We can see that the MPC’s decisions have had a positive impact on bringing inflation down from a high of 11% in October 2022. With headline inflation down to 2.2% in July, we’re starting to see domestic price pressures gradually ease and inflation expectations normalise. Despite a likely uptick in inflation later this year due to energy prices, we should remain broadly on target for a return to the Bank’s 2% target for 2025. 

 

What would you like to see in the UK Budget this autumn?   

We haven’t quite got to the point of publishing our Budget submission just yet, so I need to be careful not to give too much away!  

I think the main thing is keeping the pedal to the metal in the quest for growth. We know there’s a challenging fiscal inheritance, and we’re also realistic enough to know that the spending taps aren’t suddenly going to be turned to full flow. But that doesn’t mean the Government can sit on its hands. The country can’t afford for that to happen.  

In terms of boosting productivity and business investment, we really need the publication of a business tax roadmap. One that is simple, digitised, and gives firms the stability they need to plan. All of the chopping and changing of tax rates and investment allowances over the last few years has created uncertainty for long-term investment plans.  

We also need to look at labour participation and how we help people return to and stay in work. Expanding non-taxable health support would incentivise employers to invest in the health of their workforce – while keeping more people in the workforce. Our research even shows that making employee assistance programmes and early occupational health referrals fully tax-free could deliver a £2.8bn boost to the economy.  

On skills, we urgently need to look at the apprenticeship levy. Whether here in Scotland or across the UK, it just isn’t working for employers or employees. We need it to be more transparent and flexible.   

I’ve talked a lot about the amazing opportunities that the net zero transition provides for our economy – and how Scotland will play a leading role in both driving sustainable change and capitalising on those opportunities. But to do that, we need help from government, in terms of providing the institutional scaffolding necessary to turn that ambition into action.  

Establishing a long-term Net Zero Investment Plan would help catalyse the public and private investment we need to reach net zero by 2050. Linking UK and EU carbon pricing systems would boost liquidity and limit carbon leakage. And utilising incentives like capital allowances and investment tax credits can help drive innovation, and the supply and adoption of green technologies.  

I also think we have to be aggressive in breaking down those big barriers to growth. Both the UK and Scottish governments have made commitments to reforming planning processes. That’s great, now let’s see it through. Business rates may be devolved, but the complaints about them are common across the UK. Systems are too complex, too unpredictable, and, ultimately, unfair. That needs to change.   

There are also things we simply have to keep doing. Recent talk about pausing or scrapping key capital and infrastructure projects is a real concern for businesses that have invested in their success. They’re not only a good thing for shoring up business confidence, but they also act as a lightning rod for the kind of private investment we need to boost growth. We can’t just look at headline cost in these cases, we have to see investments as a downpayment on a growing economy and a better, more prosperous future.