5. Scenario Analysis

5.1 Introduction

5.1.1 The derivation of multipliers, as was reported in Section 4 above, is a routine and fairly mechanical use of the Social Accounting Matrix once it has been constructed. These multipliers can be used to assess the effects of any particular change in the external circumstances (i.e. demand for sectoral output) of the local economy. However, a more interesting and creative use of the SAM is to apply it to a number of "scenarios", i.e. a specified set of circumstances which it is considered may apply to the economy, perhaps in the near future. In practice, some at least of these scenarios would not appear overnight, but the static nature of the SAM (and IO) technique means that each must be analysed as an "impact", with questions of adjustment over time (including pre-emptive and precautionary action) left to discussion.

5.1.2 The following impact scenarios were chosen for analysis:

· a 20% increase in tourism activity from 1997 levels

· continued ageing and numerical decline in the Western Isles population

· a 25% increase in local processing from the sea-fishing sector

· the closure of the company Lewis Offshore

· a 25% increase in the cost of sea transport on the price of outputs from all other sectors.

5.1.3 Each of these is now analysed in turn. For the first four scenarios, the impact on not only the level of employment but also occupation type is investigated through the use of the employment-occupation matrix.

5.1.4 The SAM matrix, methodology and software made available in this study will enable a number of other scenarios and issues to be analysed along similar lines. These scenarios might include the impact of new industries or large-scale developments in the Western Isles, upturns or downturns in various other sectors, changes in existing policies (e.g. the Common Agricultural Policy), or alterations in local and/or central government arrangements (e.g. funding, activities). Various other economic developments and issues, e.g. the impact of new technology (e.g. IT) or human resource development (e.g. skills training, or higher education) might also be tackled, though in addressing these more endogenous and/or dynamic scenarios the limitations of the SAM data and method should be appreciated.

5.2 A 20% Increase in Tourism Activity

5.2.1 A 20% increase in tourist¹⁵ activity is considered a reasonable if optimistic scenario. The effect of such an increase is measured from 1997 levels on the Western Isles economy, as is the effect of a change in the composition in visitor types.

5.2.2 Total tourist expenditure in 1997 is estimated as being £31,725,000. Of this, £22,483,000 is on goods and services produced in the Western Isles, the rest being either imports or VAT or receipts. A 20% increase in tourism would thus increase expenditure on Western Isles goods and services by £4,496,000. This is the injection fed into the model. The simplest assumption to make is that the proportion of each visitor-type stays identical to that observed in the base year (1997), and so straightforward use of the multiplier coefficients results in Table 5.1. Total gross output increases by £6.7m, £2.2m more than the injection, raising total Western Isles output by 1.6%.

Table 5.1 Impact of 20% increase in tourism on the sectoral output values and factor payments, assuming unchanged visitor distribution

		Increase in Value of Gross Output (£'000)	Change from 1997 (%)
1	Agriculture	245.0	2.8
2,3,5	Sea fishing	140.6	0.9
4	Fish farming	16.9	0.1
6	Electricity, gas, water	92.6	1.8
7	Extraction of ores, etc.	64.2	1.6
8	Textiles	15.7	0.1
9	Pottery and jewellery	52.9	6.4
10	Food & drink manuf. & processing	12.3	3.0
11	Fish processing, prsv'g, wholesaling	10.4	0.1
12	Other manufacturing	49.5	0.6
13	Construction	165.1	0.4
14	Distribution	717.9	1.4
15	Hotels	1339.2	17.0
16	Other accommodation	270.5	18.7
17	Catering	578.6	14.3
18	Land transport	152.9	0.9
19	Air transport	534.3	8.2
20	Sea transport	514.8	16.0
21	IT services & telecoms	92.6	1.0
22	Banking and Insurance	211.7	1.6
23	Media	13.6	0.6
24	Education	16.7	0.0
25	Health	33.7	0.2
27	Other public services	594.8	0.6
28	Other services	730.8	6.7
29	Public administration	34.7	0.7
	Total	6702.0	1.6
		Increase in Factor Payments (£'000)	Change from 1997 (%)
	Income from employment	3299.7	1.9
	Gross profit etc.	326.6	0.8
	Total factor earnings	3626.3	1.7

5.2.3 An alternative approach is to assume some change in the composition of visitor types to the Western Isles. Each visitor type has a different expenditure pattern and thus will give rise to differing multiplier effects. Table 5.2 shows the results of investigating the effects of 20% increases in tourist expenditure by each type of tourist, one at a time. Thus for example the first column of figures shows the effects of an extra £4,496,000 expenditure from an increase in day visitors only. The results suggest that day visitors generate the largest local multiplier effects per £ of spend, while people staying in hotels generate the least. However, the volume of tourists required to generate this increase in expenditure is far greater in the case of day visitors, i.e. far more day visitors than B&B guests are needed to generate an additional £4,496,000 of tourist expenditure. This point is shown clearly in Table 5.3 which reports the impact of assuming each visitor type increases by 20% from 1997 levels.

Table 5.2 Impact of a 20% increase in total tourism expenditure, assuming that the increase is due to one visitor type only

		Type of visitor by accommodation
		Day visitor	Stay with friends/rel	Hotel	Guest houses, B&B etc.	Miscell.
	Gross output of sectors (£'000):
8	Textiles	38.7	20.4	5.1	19.7	14.4
9	Pottery and jewellery	3.4	89.7	27.0	63.2	57.3
15	Hotels	38.3	114.9	2897.2	759.2	1228.9
16	Other accommodation	27.3	59.3	34.0	397.1	131.7
17	Catering	528.1	770.3	342.0	671.9	596.7
	All other sectors	6160.1	5797.2	3448.3	4755.4	4738.5
	Total	6795.8	6851.6	6753.5	6666.4	6767.6
	Factor earnings: (£'000)
	Income from employment	3594.0	3273.6	3188.2	3342.3	3308.2
	Gross profit etc.	342.3	367.4	321.7	326.1	331.2
	Total	3936.3	3641.0	3510.0	3668.4	3639.4

Table 5.3 Impact of increase in tourism on selected sectors, assuming each visitor type increases by 20%

		Day visitor	Stays with friends or relatives	Hotel	Guest houses, B&B etc.	Miscell-aneous
	Gross output of sectors (£'000):
8	Textiles	0.6	0.7	1.4	12.6	0.5
9	Pottery and jewellery	0.0	2.9	7.5	40.4	2.1
15	Hotels	0.5	3.7	804.9	485.8	44.3
16	Other accommodation	0.4	1.9	9.4	254.1	4.7
17	Catering	7.5	24.7	95.0	429.9	21.5
	All other sectors	87.8	185.6	958.1	3042.7	170.9
	Total increase in Gross Output (injection)	96.9 (64.1)	219.4 (144.0)	1876.4 (1249.4)	4265.4 (2877.1)	244.0 (162.2)
	Factor earnings: (£'000)	64.1	144.0	1249.4	162.2	2877.1
	Income from employment	51.2	104.8	885.8	2138.5	119.3
	Gross profit etc.	4.9	11.8	89.4	208.6	11.9
	Total	56.1	116.6	975.2	2347.1	131.2

Note injection is 20% of the value of expenditure in the base year.

5.2.4 Table 5.4 shows the impact on employment consistent with the first scenario, that is, assuming the same proportion of each visitor type as in 1997. An additional 416 FTE jobs would be created, or 4.25% of current (1997) employment. The greatest increase, in absolute and relative terms is in the "personal services" category (which includes many hotel employees), and managers and sales occupations also show relatively high increases.

Table 5.4 Impact on employment of 20% increase in tourism, assuming unchanged visitor patterns, Western Isles, 1997

Type of employment:	Increase in employment by occupation type (FTEs)	% change from 1997 level
1. Managers and administrators	54.6	4.9
2. Professional occupations	19.4	2.2
3. Associate professional and technical occupations	18.0	2.7
4. Clerical and secretarial occupations	51.4	4.5
5. Craft and related occupations	62.9	3.3
6. Personal and protective service occupations	89.7	8.6
7. Sales occupations	28.4	5.0
8. Plant and machine operatives	29.5	3.4
9. Other occupations	62.5	4.0
Total	416.4	4.3

5.3 Demographic Ageing and Decline

5.3.1 This scenario envisages a continuation of the recent changes in population structure in the Western Isles. These are represented by (a) a general ageing of the population profile, and (b) an overall projected population decline of 1336 persons or 4.65% between 1997 and 2007. The former is based on trends observed between the 1981 and 1991 population censuses, and the latter percentage is based on GRO projections. Table 5.5 shows the precise patterns assumed.

Table 5.5 Population and age group projections 1997-2007, Western Isles

	1997	%	2007	%	change	%
Age 0-15	5842	20.31	4914	17.92	-928	-15.88
Age 16-24	2957	10.28	2609	9.51	-348	-11.77
Age 25-64	14778	51.39	14794	53.95	16	0.11
Age 65+	5181	18.02	5105	18.62	-76	-1.47
Total	28758	100.00	27422	100.00	-1336	-4.65

Source: General Register Office for Scotland, 1999.

5.3.2 The changes in the population level will affect the level of household consumption of goods and services. However, since each household type has a differing pattern of expenditure, the changing age structure will also have implications for household demand. The simulation takes both these factors into account. In addition, the level of final demand for school education was adjusted to allow for the decline in population aged 15 or less.

5.3.3 The first stage in the analysis involved translating the projected changes in level and structure of population into changes in the proportion of each household type in the model. The new level of expenditure of each household type was then estimated assuming that the average household expenditure of each type does not change¹⁶. Table 5.6 indicates the estimated levels of total household expenditure that were then fed into the SAM model. Expenditure from families, i.e. households with adults and dependants, decline by nearly 12%.

Table 5.6 Changes in total expenditure of household types as a result of population changes, Western Isles 1997

	Total expenditure (£'000)
	1997	2007	change
Adult households, no dependants	109146	117220	8074
Adults with dependants	124123	109516	-14606
Retired households	32151	33222	1070
Total	265420	259958	-5461

5.3.4 Table 5.7 shows the general impacts on the Western Isles economy of the assumed changes in population structure. The results are not very significant, with total factor earnings in the economy falling by only 1.8%. This is because the major proportion of household expenditure is "leaked" from the local economy through import demand. Thus the effects of the fall in total household expenditure on the Western Isles economy are dampened.

Table 5.7 Economic impacts of changes in 1997 population structure, Western Isles

	Change (£'000)	% change from 1997 level
Total gross output of all sectors	-6782.5	-1.6
Factor earnings: income from employment	-3690.4	-2.1
Gross profits etc	-220.6	-0.5
Total factor earnings	-3911.0	-1.8

5.3.5 Table 5.8 shows the employment effects of the same population changes. About 133 FTE jobs are lost (only about 10% of the population decline), disproportionately amongst the professional and associated occupations.

Table 5.8 Employment effects of changes in 1997 population structure. Western Isles

	Changes in employment by occupation type (FTEs)	% change from 1997 level
1. Managers and administrators	-11.6	-1.03
2. Professional occupations	-33.5	-3.81
3. Associate professional and technical occupations	-24.0	-3.57
4. Clerical and secretarial occupations	-19.8	-1.72
5. Craft and related occupations	-8.2	-0.44
6. Personal and protective service occupations	-9.3	-0.90
7. Sales occupations	-6.5	-1.14
8. Plant and machine operatives	-5.9	-0.67
9. Other occupations	-14.4	-0.91
Total	-133.3	-1.36

5.3.6 As an additional exercise, one could also estimate the impact of doubling the trends, i.e. assuming total population changes. Because the SAM model is linear, all results simply double in magnitude from those above (see, for example, Table 5.9 and Table 5.10).

Table 5.9 Doubled population reductions, Western Isles 1997

	Doubled Reduction, 1997-2007	New level, 2007
Age 0-15	-1856	3986
Age 16-24	-696	2261
Age 25-64	32	14810
Age 65+	-152	5029
Total	-2672	26086

Table 5.10 Impact of demographic changes assuming doubled rates of population decline, Western Isles 1997

	Change (£'000)	% Change from 1997 level
Total gross output of all sectors	-13750.7	-3.2
Factor earnings:income from employment	-7457.7	-4.2
Gross profits etc	-451.8	-1.0
Total factor earnings	-7909.5	-3.6

5.4 A 25% Increase in Local Processing from the Sea-Fishing Sector

5.4.1 This scenario is envisaged as a 25% rise in the value of purchases by fish processing (sector 11) from the sea fishing sectors (2, 3 and 5), as a result of more successful local marketing of fish rather than direct exports. Consequently, the value of exports from the sea fishing sector is reduced by the same amount to compensate, i.e. the quantity and value of fish landed in the Western Isles is left unchanged from 1997 levels. Also, the "technology" of the fish processing sector is left unchanged, i.e. input or cost proportions are fixed as in the base year, but the total output of the sector increases.

5.4.2 Table 5.11 shows the main effects on Western Isles sectors resulting from this change in demand, taking into account the various sectoral interdependencies in the economy. Unsurprisingly, the greatest effect is within the fish processing sector itself, at around the initial "impact" of 25%, with sea fishing output up by 16%, and banking by 4%. Overall, Western Isles output rises by 2.6%.

Table 5.11 The impact of a 25% increase in local processing of sea fishing output on Western Isles gross output levels, 1997

	Sector	Change in gross output (£'000)	% difference from 1997
1	Agriculture	243.8	2.6
2,3,5	Sea fishing	2771.5	16.5
11	Fish processing	4776.5	25.1
14	Distribution	762.1	1.5
22	Banking	557.1	4.0
	All other sectors	2327.9	0.7
	Total	11439.1	2.6

5.4.3 Table 5.12 shows the impact on factors earning, totalling nearly £7m or 3.1% of the Western Isles total, with a relatively large effect on capital earnings (profits) rather than labour (employment income). Table 5.12 shows that the increase in fish processing would bring about another 270 FTE jobs, or 2.8% above the 1997 level, mainly in the "other occupations" category, and in management.

Table 5.12 Impact of 25% increased local fish processing on factor earnings, Western Isles 1997

	Change in factor earnings (£'000)	% difference from 1997
Income from employment	5138.3	2.9
Gross profit etc.	1775.9	4.1
Total	6914.2	3.1

Table 5.13 Employment impact of 25% increased local fish processing, Western Isles 1997

Socio-Economic Class	Increase in employment by occupation type (FTEs)	% change from 1997 level
1. Managers and administrators	47.5	4.2
2. Professional occupations	6.5	0.7
3. Associate professional and technical occupations	5.7	0.8
4. Clerical and secretarial occupations	16.7	1.4
5. Craft and related occupations	27.2	1.4
6. Personal and protective service occupations	6.6	0.6
7. Sales occupations	12.0	2.1
8. Plant and machine operatives	23.1	2.6
9. Other occupations	124.8	7.9
Total	270.0	2.8

5.5 Closure of Lewis Offshore

5.5.1 The firm Lewis Offshore has been included in "Construction" (sector 13) in the SAM. Using data from the company, the row and column of this sector were adjusted to reflect the situation whereby Lewis Offshore no longer exists. In 1997 (the base year for the SAM and survey exercises), the company was very active, fulfilling a major contract for the offshore industry, but the fluctuations of this industry, as recently experienced, naturally suggest consideration of a less prosperous environment.

5.5.2 The methodology used for this scenario is equivalent to that used to investigate the importance of the forestry sector in the UK economy (McGregor and McNicoll, 1991).

5.5.3 The total turnover of Lewis Offshore in 1997 was £23,030,000, total factor earnings of the company were £6,280,000 and total employment 450 FTEs. The results in Table 5.14 show the overall fall in Western Isles economic activity due to closure would be higher than this, due to the indirect and induced effects stimulated by the company. Overall figures suggest that the closure of the company would result in falls of 6.1% in gross output levels, 3.7% in factor earnings (Table 5.15), and 5.7% in employment across the whole economy (Table 5.16). Lewis offshore itself employed 450 people in 1997, and the results suggest that the total economy-wide loss in employment would be an additional 105 FTE jobs over and above this figure.

Table 5.14 The Impact of Lewis Offshore Closure on Western Isles Gross Output, 1997

	Sector	Change in gross output (£'000)	% difference from 1997
6	Electricity, gas, water	-289.3	-5.3
13	Construction	-23178.1	-54.1
14	Distribution	-696.2	-1.3
27	Other public services	-989.5	-1.0
28	Services	-140.8	-1.3
	All other sectors	-1391.9	-0.6
	Total	-26685.7	-6.1

Table 5.15 Impact of Lewis Offshore Closure on Western Isles Factor Earnings, 1997

	Change in Factor Earnings (£'000)	% Difference from 1997
Income from employment	-6980.4	-3.9
Gross profit etc.	-1097.5	-2.5
Total	-8077.9	-3.7

Table 5.16 Impact of Lewis Offshore Closure on Western Isles Employment, 1997

Occupation Type	Change in employment by occupation type (FTEs)	% change from 1997 level
1. Managers and administrators	-20.2	-1.8
2. Professional	-15.8	-1.8
3. Associate professional and technical	-5.7	-0.8
4. Clerical and secretarial occupations	-28.9	-2.5
5. Craft and related	-445.2	-23.7
6. Personal and protective service	-7.6	-0.7
7. Sales	-7.7	-1.3
8. Plant and machine operatives	-14.1	-1.6
9. Other	-10.1	-0.6
Total	-555.4	-5.7

5.6 A 25% change in the cost of sea transport

5.6.1 This scenario involves investigating the effects of a 25% increase or decrease in the cost of sea transport, and attempts to measure the impact on the price of outputs from all other sectors in the Western Isles economy. An adapted version of the Leontief price model (Miller and Blair, 1986) was used to carry out the analysis. This model reverses the conventional quantity-based I-O analysis to one where price levels are endogenous and relative quantities are fixed. This gives an indication of the economy-wide effects of a change in a price (usually via wage levels) on the prices of output in each sector. However, it is restrictive in that excludes substitution effects which would normally be triggered, at least after a time, by price changes. In the present study, the basic price model has been adapted to make the price of sea transport exogenous.

5.6.2 The impact of an increase in the cost of sea transport has two effects, both of which are accommodated in the adapted model. Firstly, it increases the costs of sea transport used by each sector (row 20 in the SAM), and secondly it affects the cost of imported inputs used in the production process.

5.6.3 Because there is no robust information on the extent to which a 25% increase in sea transport costs would affect the value of imports, three alternative scenarios were run, involving a 5%, 10% and 20% increase in total imports costs respectively. In fact, the impact would vary by sector depending on the type of goods they imported and their origin etc., but such information does not form part of the SAM database, so analysis had to be carried out in a somewhat crude way. Nevertheless, it is considered a useful starting point.

5.6.4 Table 5.17 shows the effects on output prices of each sector for the three alternative assumptions relating to import costs. Focussing on the first column, the results suggest that the increase in transport costs will result in a 4.811% increase in the price of output from the agriculture sector relative to 1997 price levels (the largest effect by sector), a 2.248% increase in the price of construction, etc. Since direct expenditure on sea transport by each sector was fairly small, the impact on the cost of imports was by far the most important determinant of the price changes. Thus sectors with high direct import propensities tend to end up with large price increases, although the model simulation does also take into account indirect effects of the "shock" to the economy.

5.6.5 The scenarios analysed here involved increases in sea transport and hence import prices. Naturally, the reverse "shock", i.e. a decrease in transport charges, is of equal interest. However, given the linear mathematical structure of the model, SAM estimates of the effects for such a scenario will simply be the reverse of those shown in Table 5.17. To investigate these possibly asymmetric effects for this reverse scenario (and indeed the reverse versions of the others above) would require quite sophisticated economic modelling of "imperfect competition" and other features of the Western Isles economy, going beyond the remit and resources of this study.

Table 5.17 Sectoral Output Price Effects of a 25% Increase in the Cost of Sea Transport, Western Isles 1997

		Assumed change in import costs
	Sector	5%	10%	20%
1	Agriculture	4.811	9.589	19.146
22	Banking and insurance	3.569	7.137	14.274
19	Air transport	2.818	5.630	11.254
10	Food manufacturing	2.625	5.236	10.457
13	Construction	2.248	4.418	8.757
8	Textiles	2.240	4.479	8.955
27	Other public services	2.224	4.437	8.865
14	Distribution	2.141	4.274	8.540
9	Pottery and jewellery	1.991	3.972	7.933
2,3,5	Sea fishing	1.989	3.957	7.893
12	Other manufacturing	1.974	3.944	7.886
6	Electricity, gas, water	1.808	3.608	7.207
23	Media	1.745	3.388	6.675
15	Hotels	1.535	3.066	6.126
11	Fish processing, preserving, wholesaling	1.397	2.783	5.557
24	Education	1.236	2.469	4.934
4	Fish farming	1.235	2.464	4.923
18	Land transport	1.107	2.198	4.381
25	Health	0.944	1.884	3.766
16	Other accommodation	0.805	1.606	3.209
21	IT services and telecommunications	0.662	1.301	2.581
17	Catering	0.508	1.016	2.032
7	Extraction of ores, etc.	0.183	0.365	0.730
28	Other services	0.001	0.002	0.004
29	Public administration	0.000	0.000	0.000

15 "Tourist" is used here as a synonym for "visitor" (the more accurate term) which includes (e.g.) business visitors.

16 The demand for other public services (health, recreation etc) is also likely to adjust as a result of changing age structure, but no adjustment was made to the cost of these services in this analysis.