Economy of Scotland

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The headquarters of the Bank of Scotland, located on the Mound in Edinburgh.
The headquarters of the Bank of Scotland, located on the Mound in Edinburgh.

The economy of Scotland is closely linked with the rest of Europe, and is essentially a mixed economy. Scotland has the third largest GDP per capita of any part of the United Kingdom after London and the South East of England.

Scotland was one of the industrial powerhouses of Europe from the time of the Industrial Revolution onwards, being a world leader in manufacturing and shipbuilding related industries, at the time, which today has left a legacy in the diversity of goods and services which the Scottish economy produces from textiles, whisky and shortbread to aeroengines, buses, computer software, ships, avionics and microprosssors to banking, insurance and other related financial services.

In common with most other advanced industrialised economies, Scotland has seen a decline in the importance of the manufacturing industries and primary-based extractive industries. This has, however, been combined with a rise in the service sector of the economy which is now the largest sector in Scotland, with significant rates of growth over the last decade.

The British Pound Sterling is the official currency of Scotland, and the central bank of the UK is the Bank of England which retains responsibility for the monetary policy of the whole of the United Kingdom.


After the Industrial Revolution, the Scottish economy concentrated on heavy industry, dominated by the shipbuilding, coal mining and steel industries. Scottish participation in the British Empire also allowed the Scottish economy to export its output throughout the world. However heavy industry declined in the latter part of the 20th century leading to a remarkable shift in the economy of Scotland towards a technology and service sector based economy. The 1980s saw an economic boom in the Silicon Glen corridor between Glasgow and Edinburgh, with many large technology firms relocating to Scotland. Today the industry employs over 41,000 people. Scottish-based companies have strengths in information systems, defence, electronics, instrumentation and semi-conductors. There is also a dynamic and fast growing electronics design and development industry, based around links between the universities and indigenous companies like Wolfson, Linn, Nallatech and Axeon. There is also a significant presence of global players like National Semiconductor and Motorola. Other major industries include banking and financial services, education, entertainment, biotechnology, transport equipment, oil and gas, whisky, and tourism. The Gross Domestic Product (GDP) of Scotland is just over £74 billion ($130 billion) (2002) , giving a per capita GDP of £14,651 ($25,546) (2002).

Edinburgh is the financial services centre of Scotland and the sixth largest centre in Europe, with many large financial firms based there, including the Royal Bank of Scotland (the second largest bank in Europe), HBOS (owners of the Bank of Scotland) and Standard Life Insurance. Glasgow is Scotland's leading seaport and is the fourth largest manufacturing centre in the UK, accounting for well over 60% of Scotland's manufactured exports. Shipbuilding, although significantly diminished from its heights in the early 20th century, is still a large part of the Glasgow economy. The city has the UK's largest and most economically important commerce and retail district after London's West End. Glasgow is also one of Europe's top 20 financial centres and is home to many of the UK's leading companies. Other important industries include textile production, chemicals, distilling, brewing and fishing.


Whisky stills at Glenfiddich Distillery in Moray.
Whisky stills at Glenfiddich Distillery in Moray.

Manufacturing in Scotland has shifted its focus in recent years with heavy industries such as shipbuilding and iron and steel declining in their importance and contribution to the economy. It is generally argued that this has been in response to increasing globalisation and competition from low cost producers across the world, which has eroded Scotland's comparative advantage in such industries over the latter half of the 20th century. However, the decline in heavy industry in Scotland has been supplanted with the rise in the manufacture of lighter, less labour intensive products such as optoelectronics, software, chemical products and derivatives as well as life sciences. Not only has the decline of heavy industry, in the last 20 to 30 years, resulted in a sectoral shift of labour, it has led to smaller firms, strengthening links with the academic community and substantial, industry-specific retraining programmes for the workforce.


Scotch Whisky is probably the best known of Scotland's manufactured exports contributing around £800 million to the Scottish economy, supporting 41,000 jobs as well as adding £2 billion to the balance of trade making it one of the UK’s top five manufacturing export earners. The Whisky industry also generates a substantial income for the government with around £1.6bn raised in duty each year. The principal whisky producing areas include Speyside and the island of Islay where there are 8 distilleries providing a major source of employment for the island. In many areas the whisky industry is closely related with tourism, with many distilleries also functioning as tourist attractions.


The electronics industry in Scotland Silicon Glen is the phrase that is used to describe the growth and development of Scotland's hi-tech and electronics industries in the Central Belt through the 1980s and 1990s, analogous to the larger concentration of hi-tech industries in Silicon Valley, California. Companies such as IBM (which maintains a plant at Greenock near Glasgow) have been in Scotland since the 1950's being joined in the 1980's by others such as Sun Microsystems at Linlithgow. 45,000 people are employed by electronics and electronics-related firms, accounting for 12% of manufacturing output. Today, Scotland produces 28% of Europe’s PCs; more than seven per cent of the world’s PCs; and 29% of Europe’s notebooks.


Historically textiles were a large employer in Scotland in places such as the Scottish Borders, Shetland and the Outer Hebrides - areas where there is much production of wool. Knitwear and tweed are traditionally seen as cottage industries but names like Pringle have given Scottish knitwear and apparel a presence on the international market. Despite increasing competition from low-cost textile producers in SE Asia and the Indian Subcontinent, textiles in Scotland is still a major employer with a workforce of around 22,000. Furthermore the textiles industry is the 7th largest exporter in Scotland accounting for over 3% of all Scottish manufactured products


In 2004, total Scottish exports (excluding intra-UK trade) was provisionally estimated to be £17.5 billion, of which 70% (£12.2 billion) were attributable to manufacturing. The largest export products for Scotland are whisky, electronics, and financial services.

Major Trading Partners

Excluding intra UK trade, the United States and the EU constitute the largest markets for Scotland's exports. As part of the United Kingdom and the European Union, Scotland fully participates in the Single Market and Free Trade Area which exists across all EU member states and regions. Recently with the high rates of growth in many emerging economies of SE Asia such as China, Thailand and Singapore, there has been a drive towards marketing Scottish products and manufactures in these countries, with Singapore entering the top ten markets for Scottish exports in 2004.

Top 10 export destinations, 2004
Export destination Value (£million)
USA 2,610
Netherlands 1,645
Germany 1,600
France 1,165
Spain 775
Republic of Ireland 700
Switzerland 585
Belgium 555
Italy 525
Singapore 465
Source: Scottish Executive Global Connections Survey 2005



Standard Life Bank, in the Financial District of Edinburgh
Standard Life Bank, in the Financial District of Edinburgh

Edinburgh is Europe's fifth largest financial centre, with influential financial players such as the Royal Bank of Scotland , the Bank of Scotland, Scottish Widows and Standard Life all having a presence in the city.

Banking in Scotland has a long history, beginning with the creation of the Bank of Scotland, in Edinburgh, in 1695. Today Scotland is home to 4 clearing banks - the Bank of Scotland, the Royal Bank of Scotland, the Clydesdale Bank and Lloyds TSB Scotland. The Royal Bank of Scotland which is the second largest bank in Europe, fifth largest in the world by market capitalisation and has significant international operations recently opened its new global headquarters in Edinburgh augmenting the city's position as a major financial centre. Many other international banks are beginning to operate bases in Scotland, as the sector expands. In 2005 Scotland ranked second only to London in the European league of headquarters locations of the 30 largest banks in Europe as measured by market value .

Finance in Scotland also features unique characteristics. Although the Bank of England remains the central bank for the UK Government, three Scottish clearing banks still issue their own banknotes: (the Bank of Scotland, the Royal Bank of Scotland and the Clydesdale Bank). These notes have no status as legal tender in England, Wales or Northern Ireland; but in practice they are universally accepted throughout the UK , as well as in the Isle of Man and the Channel Islands. The full range of Scottish bank notes commonly accepted are £5, £10, £20, £50 and £100. (See British banknotes for further discussion).

Centred primarily on the cities of Edinburgh and Glasgow, the development of financial services industry in the Scottish Economy, has taken place over the last 10 to 20 years. The sector makes a significant contribution to the economy employing 5% of the Scottish workforce or 113,160 people and generating £5bn or 6% of Scotland's GDP . The financial services industry in Scotland is also one of its fastest growing areas with a growth rate of over 35% over the period 2000 to 2005 .

Investment, Insurance and Asset Servicing

Scotland is one of the world's biggest fund management centres with over £300bn worth of assets directly serviced or managed in the country. . Scottish fund management centres have a major presence in areas such as pensions, property funds, investment trusts as well as in retail and private client markets. Similarly asset servicing on behalf of fund managers has become an increasingly important component of the financial services industry in Scotland with Scottish based companies providing expertise in securities servicing, investment accounting, performance measurement, trustee and depositary services and treasury services.


Gleneagles Hotel, Perthshire. Tourism is one of Scotland's fastest growing economic sectors.
Gleneagles Hotel, Perthshire. Tourism is one of Scotland's fastest growing economic sectors.

It is estimated that tourism accounts for 3% of Scotland's economic output. Scotland is a well-developed tourist destination with attractions ranging from unspoilt countryside, mountains and abundant history. Tourism is responsible for sustaining 200,000 jobs mainly in the service sector, with tourist spending averaging at £4bn per year . Domestic tourists (those from the United Kingdom) make up the bulk of visitors to Scotland. In 2002, for example, UK visitors made 18.5 million visits to Scotland, staying 64.5 million nights and spending £3.7 billion. In contrast, overseas residents made 1.58 million visits to Scotland, staying 15 million nights and spending £806 million. In terms of overseas visitors, those from the United States made up 24% of visits to Scotland, with the United States being the largest source of overseas visitors, and Germany (9%), France (8%), Canada (7%) and Australia (6%), following behind.


Glasgow International Airport, the largest passenger airport in Scotland.
Glasgow International Airport, the largest passenger airport in Scotland.

Infrastructure in Scotland is varied in its provision and its quality. The densest network of roads, railways and motorways is concentrated in the Central Lowlands of the country where around 70% of the population live. The motorway and trunk road network is principally centred on the cities of Edinburgh and Glasgow and connecting them to other major concentrations of population, and is vitally important to the economy of Scotland. Key routes include the M8 motorway, which is one of the busiest and most important major routes in Scotland, with other primary routes such as the A9 connecting the Highlands to the Central Belt, and the A90/ M90 connecting Edinburgh and Aberdeen in the east. The M74 and A1, in the west and east of the country, respectively, provide the main road corridors from Scotland to England. The Scottish Executive has stated that it intends to spend £3bn on a capital investment scheme to improve Scotland's road and rail system, over the next decade , with the setting up of a national agency in January 2006 - Transport Scotland to oversee this. Many roads in the Highlands are single track, with passing places.

The rail network is primarily centred on the central belt and is used principally as a means of public transport, with some freight movements - for example from the port at Grangemouth. After a large rationalisation of routes in the 1960s, which led to station and line closures, the rail network is currently being expanded, to cope with ever increasing levels of passenger demand. The rail-operator First ScotRail operates most routes within Scotland, with long-distance connections to London operated by GNER or Virgin Trains. Proposals which have been mooted include the construction of a high-speed MAGLEV rail system connecting Edinburgh and Glasgow which, it estimated, will cut journey times between the two cities by around 30 minutes . Other measures suggested include the electrification of the rail system in order to cut journey times.

In 2004, 22.6 million passengers used Scotland's airports, with their being 514,000 aircraft movements with Scottish airports being amongst the fastest growing in the United Kingdom in terms of passenger numbers. Plans have been published by the major airport operator BAA plc to facilitate the expansion of capacity at the major international airports of Glasgow, Edinburgh and Aberdeen, including new terminals and runways to cope with a large forecasted rise in passenger use. Prestwick Airport also has large air freight operations and cargo handling facilties. Scotland is well-served by many airlines and has an expanding international route network, with recent long-haul services to Dubai, New York and Pakistan.

Major deep-water Port facilities exist at Aberdeen, Grangemouth, Greenock, Peterhead, Scapa Flow and Sullom Voe. Scotland is connected to mainland Europe by a dedicated ferry service between Rosyth (near Edinburgh) and Zeebrugge in Belgium. In addition to this many remote island communities on Scotland's western seaboard are served by lifeline ferry services operated by the state-owned company Caledonian MacBrayne, which carry tourists as well as freight and are vital to the economies of these islands.

The Role of the Public Sector

The public sector, in Scotland, has a significant impact upon the economy and comprises central government departments, local government, and public corporations. In quarter 3 of 2005, there were 577,300 people employed in the public sector, which accounts for 23.4% of employment in Scotland - this includes all medical professionals employed within the National Health Service in Scotland, those employed in the fire, police and emergency services and those employed in the state education and higher education sector. This is in addition to employees of the government in the civil service and in local government as well as public bodies and corporations.

There is a clear separation of responsibility of the powers of both the UK government and the devolved Scottish Executive in relation to the formulation and execution of national economic policy as it affects Scotland - this is set out under Section 5 of the Scotland Act 1998.

UK Government

The UK Government along with the Parliament of the United Kingdom retains full control over Scotland's fiscal environment, in relation to taxation (including tax rates and tax collection) and the overall share of central government expenditure apportioned to Scotland, in the form of an annual block grant. It also retains complete responsibility for the operation of the Welfare State, in terms of pensions, unemployment insurance and child benefit - as part of the UK-wide Welfare State exercised by the UK Department for Work and Pensions and HM Treasury.

Scottish Executive

The Scottish Executive has very limited power to raise or lower the rate of income tax in Scotland by up to 3p in the pound, but has the power to vary business rates and can regulate the application of local taxes such as the council tax levied by local authorities in Scotland. Nevertheless the Scottish Executive has full control over how Scotland's annual block grant is divided between government departments, such as healthcare and education and on state-owned enterprises, such as Scottish Water and Caledonian MacBrayne. The Scottish Executive does however have control over Economic Development policy, and controls, funds and regulates the national Economic development Agency - Scottish Enterprise. In 2006, for example, the budget of the Scottish Executive was around £25bn, which the Scottish Executive can spend on the areas under its jurisdiction such as education, healthcare, transport, the environment and justice.

Local Government

The 32 unitary authorities in Scotland have the ability to levy a local tax, called the Council Tax which is used to pay for local services such as refuse collection, street lighting, roads, pavements, public parks and museums. The value of residential property is the base for the tax, with each dwelling allocated to one of eight bands coded by letters A through H (H being the highest) on the basis of its assumed capital value. Each local authority sets a tax rate expressed as the annual levy on a Band D property inhabited by two liable adults. The budget of local authorities is supplemented by direct grants from the Scottish Executive.


Education in Scotland is well-funded with very high levels of participation in all sectors of education. Participation in further and higher education is especially high, with Scottish universities generally being recognised as amongst the best in the teaching of medicine, law, engineering, science and technology. Increasingly Scotland is being seen as an exporter of education, with the number of overseas students applying to studying at universities throughout Scotland, rising substantially in recent years . Most universities are linked with a flourishing research and development sector; the University of Dundee is at the heart of a biotechnology and medical research cluster ; the University of Edinburgh is a centre of excellence in the field of Artificial Intelligence and the University of Aberdeen is a world-leader in the study of offshore technology in the oil and gas industry . Scotland generally has a well-educated population - adult Literacy rates are at over 99%.


Another major component of central government expenditure in Scotland is on healthcare and healthcare related services. The National Health Service (NHS) is the publicly controlled provider of the majority of healthcare in Scotland, with the NHS being a major employer not only in terms of doctors nurses and other key healthcare workers, but also in terms of administration. The service is administered differently from the rest of the United Kingdom and is largely free at the point of use to residents in Scotland, except for dental services (where those over 19 must pay) and prescriptions (free to the elderly and subsidised for others). In the short term spending on healthcare in Scotland remains high in response to the nations' poor diet and high instance of heart disease. In the medium to long term, the challenges of an ageing population are likely to increase demand for health services and put increasing pressure on the health service in Scotland.

Other Economic Indicators

Total Population: 5,094,800 (2005 est)

Working Age Population: 3,175,386 (2005 est.)

GDP (£million): 74,058 (2002)

Manufacturing GVA (£million): 11,110 (2003)

Number of VAT registered companies: 126,025 (2003 est.)

Number of Large Companies (250+ employees) in Scotland: 2,240 (2004)

Employment Rate (% of adults of working age): 74.7 (2004)

Median Gross Weekly Earnings of full-time workers on adult rates (£): 392.70

Claimant Unemployment Rate (%): 3.5 (2004)

People of working age claiming key Social Security benefits (%): 16.7 (Feb. 2005)

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