Conditions improve

Tax and skills challenge firms as FDI remains hot

Engineer working on power lines
Scotland needs more skilled workers

Confidence and trading conditions have improved among Scottish firms, though the country’s higher taxes are now their chief concern in attracting talent.

The Scottish Chambers of Commerce’s Quarterly Economic Indicator found that firms continue to be squeezed by rising costs, including the rise in the national minimum wage.

Chambers president, Stephen Leckie, called for a skilled migration strategy tailored to the needs of the Scottish economy to help ease recruitment difficulties.

Its findings came as EY’s Scotland Attractiveness Survey showed Scotland retained its position as second to London among UK locations attracting new Foreign Direct Investment (FDI) projects into the UK last year.

A record 142 inward investment projects were secured by Scotland in 2023, a 12.7% rise on the previous year (126).

With projects into the UK as a whole rising by just 6%, Scotland’s increased FDI flow saw its share of all UK projects rising to 14.4% (up from 13.6%), the fifth consecutive year of increase and its highest over the past decade.

This continued rise may be adding to the recruitment difficulties being experienced as domestic firms compete with incomers for the same talent. This may also force salaries to rise.

The report also came with a warning about the impact of higher taxes on Scotland retaining its position.

The Chambers survey, conducted a few weeks before the General Election, found that 55% of respondents were having recruitment difficulties compared with 47% in the previous quarter. This was largely driven by challenges across the retail and tourism sectors. Labour costs are impacting three-quarters of firms.

Despite these issues, the second quarter saw significant improvement in terms of cashflow and profits for firms – particularly profits – with growth on balance recorded for both trends. Investment intentions have also risen.

Stephen Leckie, president of the Scottish Chambers of Commerce, said: “It’s positive that the survey results are beginning to see a reversal in the consistent trend of frozen investment.”

On taxation, however, he said it “is having a major impact in attracting and retaining talent in Scotland.”

He added that this is “contributing to the significant labour challenges many businesses are already experiencing. Divergence on personal taxation has exacerbated the issue.”

He called for the Scottish and UK government “to set out long-term plans to address the current state of taxation which is impacting growth, investment and talent.

“Our report shows that over half of Scottish businesses are continuing to experience significant costs and challenges with attracting and retaining the talent they need.

“More restrictive changes to the immigration system made earlier this year, the increase in the national minimum wage, and skills shortages, are all adding pressure on employers.

“The UK Government should address this by introducing a skilled migration strategy which is tailored to the needs of the Scottish economy and restore our reputation as a welcoming and open destination for international students to study, live and work.”

On the plus side, Mr Leckie said: “Our latest survey indicates generally improving business conditions across the economy, albeit significant challenges continue to persist which are limiting the ceiling on potential growth and investment.

“The impetus to deliver a credible plan for sustainable growth lies with both the Scottish and UK Government. Now must be the moment to focus on long-term solutions to tackle poor productivity and create an environment for business investment to accelerate.”

FDI remains high

Scotland has come second to London for foreign direct investment (FDI) in nine of the past ten years, according to the EY Attractiveness Survey, but there is a warning that higher taxes in particular could erode Scotland’s place in the rankings.

Ally Scott, EY Scotland managing partner, commented: “As we celebrate the continued trend of year-on-year success in FDI, there is no room for complacency.

“We still hear frustrations from clients and the market that Scotland’s tightening economic policies, including the latest income tax hikes and issues around city and infrastructure quality, are causes for concern.

“While the potential impact of these goes far beyond FDI, the fact remains that access to talent is a major driver of attractiveness and investment.

“Action is also needed around the ease, transparency, and efficiency of planning processes to make Scotland and its cities more globally accessible to help boost the incoming flow of people and capital.”

Ally Scott
Ally Scott: no room for complacency

The US has remained the single biggest originator of FDI projects, accounting for 27 projects or 19% of Scotland’s total during the year — albeit the lowest proportion in the past decade.

Projects from Germany doubled to 20, a decade high, making it the second-biggest source of projects into Scotland, followed by France with 10.

Three Scottish cities ranked in the UK’s top 10 urban locations for FDI outside of London, as Edinburgh is placed second with 32 projects, Glasgow fourth with 25 projects, and Aberdeen eighth with 13 projects.

Utility supply is the leading sector for Scotland’s FDI, with 40 projects secured in 2023, the highest recorded by any sector in any year of the past decade in Scotland.

This is followed by digital technology, business services, and transport & logistics, each securing 14 projects. For the first time in six years, utility supply has overtaken digital technology projects in Scotland due to increasing levels of low-carbon and ‘cleantech’ investment.

This shifting trend gives rise to more projects located out with the country’s main cities as the strong rise in sustainable utility supply projects – generally located in more rural areas – could create a shift in Scotland’s investment hubs.

According to the survey, 69% of investors are planning to establish or expand operations in the UK over the next year – and 26% are planning to invest in Scotland, second only to London.

When investors were surveyed on which locations they were targeting, 23% said Edinburgh and 9% Glasgow – putting those cities in second and fourth respectively among all UK cities.

Investors’ main criteria when considering investing in the UK includes access to regional grants and incentives, the local skills base, and the availability of business partners and suppliers.

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