6. Scenario Analyses

6.1 Introduction

6.1.1  This chapter uses the 2003 SAM of the Western Isles to investigate a number of possible scenarios or specific circumstances which it is considered may apply to the economy, perhaps in the near future. In practice, none of these scenarios would not appear overnight, but the static nature of the SAM-based model means that each must be analysed as an “impact”, with questions of adjustment over time (including pre-emptive and precautionary action) left to discussion.

 

6.1.2  The following impact scenarios were chosen for analysis:

·  a decline in the Western Isles aquaculture sector

·  growth in the Western Isles population due to net in-migration and a switch in household consumption patterns

·  growth in construction sector activity and an investigation into the role of the construction sector in facilitating economic growth in the economy.

 

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

 

6.2 Economic Impact of a decline in the Aquaculture

6.2.1 The 2003 SAM suggests that the fish farming sector accounted for 7.4% of total value added in the Western Isles in 2003 making it the sixth most important sector in the economy in terms of its contribution to Gross Regional Domestic Product.  However the importance of the sector has declined since 1997, with its contribution to both value added and employment falling in absolute and relative terms.

6.2.2 Recent developments in the sector, occurring after 2003, suggest that the sector is still experiencing difficulties and may contract further.  This will have adverse effects not only for those directly employed in aquaculture but also for other Western Isles businesses who directly and indirectly supply the fish farming sector with goods and services. 

6.2.3 This section considers the economy-wide effects of a further decline in the aquaculture sector.  To make the analysis as realistic as possible, in addition to the decline in production from the sector itself, two other associated changes in the economy are taken into account:  First, the analysis takes into account that the transport requirements of fish farming businesses are changing.  In particular, sea transport is increasingly being used to bring feed to the businesses where in the past land transport or haulage firms were relied on.  Within the Input-output modelling framework, this represents a switch in production technology from that observed in the base year, 2003.  Secondly, the analysis takes into account a potential reduction in the export earnings of the land transport sector.  In addition to the earnings from transporting the exports of Western Isles businesses, haulage companies earn income from return journeys either through bringing imports into the region or simply transporting goods within the mainland.  The reduction in fish exports following a decline in the Western Isles aquaculture sector will thus have a “double whammy” impact for the land transport sector.  In addition to a decrease in income from the fish farming sector itself, it will also reduce the exports earnings potential of the sector.

6.2.4 Thus, three separate but related impacts are incorporated into the analysis:

§ A decline in exports from fish farming sector;

§ A switch from land to sea transport as means of brining in inputs to fish farming sector;

§ A decline in export earnings of the land transport sector. 

6.2.5 The magnitude of each impact is difficult to anticipate and thus the results presented below should be interpreted as exploratory only. The results presented relate to the scenario where export demand from the fish farming sector falls by 20% from 2003 levels (a drop of just over £6.15m), 50% of the 2003 value of payments by the fish farming sector to land transport switches to the sea transport sector (a fall of £688 thousand) and the reduction in the value of export earnings by the land transport sector is assumed to also equal £688 thousand.

6.2.6 Table 6.1 shows the total economic effects associated with each of the three shocks to the economy when they are modelled separately.

Table 6.1 Economy-wide effects of each component element of aquaculture shock. (figures in brackets show percentage change from 2003 baseline levels)

	Reduction in exports from fish farming sector		Switch in sourcing patterns		Fall in haulage export earnings
Change in value of output (£’000)	-8,503	(-1.7)	-17	(0.0)	-946	(-0.2)
Change in factor Income (£’000)	-5,047	(-1.9)	-119	(0.0)	-593	(-0.2)
Change in Employment (FTEs)	-103	(-1.0)	4	(0.0)	-13	(-0.1)

 

6.2.7 By far the largest effects are associated with the decline in exports from fish farming.  These are estimated to result in a 1.9% decrease in factor income and a loss of 103 FTE jobs.  The switch in technology from land to sea transport has a relatively small impact at economy level and, interestingly, despite a £119,000 loss in factor earnings, increases total employment in the region very slightly.  This is because the sectors gaining from the switch (directly and indirectly) are more labour intensive while those most adversely affected are labour extensive. The fall in export earnings of the land transport sector, when looked at independently from the other impacts is estimated to lead to all of £593 thousand in factor earnings, and 13 FTE jobs.

6.2.8 The effects from all three impacts being simultaneously imposed on the economy are shown in Table 6.2.  The combined results are not quite the same as the sum of the three separate effects in the previous table because of the use throughout of the “new” production technology matrix associated with the switch in transport suppliers. [1]

Table 6.2 Economy-wide effects of the shock to the aquaculture sector.

 (figures in brackets show percentage change from 2003 baseline levels)

 

			Combined effects		(% change from 2003 baseline)
Change in value of output (£’000)			-9,462		-1.9
Of which
4	Fish Farming			-6,153		-19.9
18	Land Transport			-1,547		-6.2
14	Distribution			-579		-1.0
27	Other Public Services			-565		-0.5
Change in factor Income (£’000)			-5,735		-2.2
Change in Employment (FTEs)			-112		-1.1

 

 

6.2.9 If all three changes take place simultaneously, an estimated 112 FTE jobs are at risk.  The sectors most affected are, not surprisingly, fish farming and land transport.  However the effects for several other sectors, in particular distribution and other public services are also noticeable.

6.2.10 Table 6.3 shows where in the economy the losses in employment will be most significant while Table 6.4 shows the type of jobs most affected.  While the sea transport sector has a net gain of 10 FTE jobs arsing from the shock, all other sectors are adversely affected. Jobs classified as “elementary” suffer most both in absolute and percentage terms.

  

Table 6.3. Sectoral Employment effects of the shock to aquaculture

		Impact on employment (FTEs)	(%) Change from 2003 level
1	Agriculture	-1.4	-0.84
2,3,5	Sea fishing	-1.1	-0.31
4	Fish farming	-57.2	-19.92
6	Electricity, gas, water	-1.6	-1.56
7	Extraction (of ores, etc.)	-0.5	-0.40
8	Textiles	0.0	-0.01
9	Pottery and jewellery	-0.2	-0.65
10	Food & drink manuf. & processing	-0.1	-0.61
11	Fish processing, prsv’g, wholesaling	-0.2	-0.07
12	Other manufacturing	-2.7	-0.79
13	Construction	-4.5	-0.38
14	Distribution	-11.5	-1.05
15	Hotels	-0.4	-0.16
16	Other accommodation	0.0	-0.01
17	Catering	-1.2	-0.52
18	Land transport	-18.1	-6.16
19	Air transport	-0.1	-0.10
20	Sea transport	10.0	3.36
21	IT services & telecoms	-2.7	-1.33
22	Banking and Insurance	-2.1	-1.51
23	Media	-0.1	-0.33
24	Education	-0.3	-0.04
25	Health	-0.2	-0.03
27	Other public services	-3.2	-0.47
28	Other services	-7.3	-0.61
29	Public administration	-5.9	-0.89
	Total	-112.4	-1.13

Note: Figures may not exactly add to totals due to rounding.

 

Table 6.4   Employment effects of aquaculture shock by occupational type

	Decease in employment by occupation type (FTEs)	% change from 2003 levels
1. Managers and Senior Officials	-29.7	-2.86
2. Professional Occupations	-3.3	-0.34
3. Associate Prof. and Technical Occupations	-6.3	-0.54
4. Administrative and Secretarial Occupations	-6.6	-0.71
5. Skilled Trades Occupations	-12.6	-0.57
6. Personal Service Occupations	-2.7	-0.38
7. Sales and Customer Service Occupations	-4.8	-0.95
8. Process, Plant and Machine Operatives	-6.8	-0.61
9. Elementary Occupations	-39.3	-3.34
Total	-112.4	-1.13

Note: Figures may not exactly add to totals due to rounding.

6.3 The impact of net immigration and change in household expenditure patterns

Population Growth

6.3.1 The population of the Western Isles in 2001 was 26,502 (General Register Office for Scotland, 2005), a substantial decrease of 10.5% from 1991.  The population level fell further to 26,100 by 2003, the base year for this report and study.  However, between 2003 and 2004 there were signs of a turnaround.  In particular a net in-migration of 315 people to the region was more than sufficient to compensate for natural change in the population. Thus, for the first time in many years, the overall population change in the region was positive with an addition of 160 persons.

6.3.2 This section investigates the benefits to the Western Isles economy of continued population growth.  In particular it considers the output, income and employment effects associated with in-migration assuming that the population continues to grow at 0.6% (the overall growth rate for 2003 – 2004) for the next 10 years.

6.3.3 An increase in the population level due to in-migration will affect the level of household consumption of goods and services.  Since each household type has a differing expenditure pattern (see section 4.4), the magnitude of effects in the economy will depend, amongst other things, on the type of in-migrants. The analysis considers the following four alternative situations:

§ Scenario A: The mix of new households (households with no children, 

households with children, and retiree households) is identical to  that observed in the base year of the study, 2003;

 

§ Scenario B: The increased population consists entirely of households with no

 dependents.

 

§ Scenario C: The increased population consists entirely of households with

 children.

 

§ Scenario D: The increased population consists entirely of retiree households.

 

6.3.4 The impact of in-migration is modelled simply as an exogenous increase in the incomes of the Western Isles household sector.  Thus, implicitly, it is assumed that the income of all the new households takes the form of either transfer payments or earnings from out-with the region. In fact such population growth would probably be responsible for the creation of economic activity elsewhere in the economy.  For example, a new household might bring with it its own business thus generating benefits not only through the household consumption expenditure but also through the businesses requirements for local inputs.  Because the latter is ignored in the analysis, the results should be interpreted as lower bound estimates of the full impacts of population-related growth.

6.3.5 As background information, Table 6.5 (based on information from the 2003 SAM) indicates the average income of each household group in 2003 along with: a) the proportion of consumption expenditure accruing to Western Isles businesses and; b) the proportion of total expenditure (including taxes and savings etc) accruing to Western Isles businesses.  Retiree households for instance are shown to have by far the lowest average yearly income and the lowest propensity to source local goods; but retain the highest proportion of spend within the region because of their lower tax and savings rates. The table also shows how each of the four population scenarios translates into injections of income into the economy.  Scenario A where there is a mix of new household types results in increases in income of all household groups while in all of the other scenarios, only one of the household groups has an increased income. The total magnitude of injections in each case depends on the average expenditure of each household type as observed in the base year, 2003.

Table 6.5  Household income and expenditure information

	Household Type
	Adults, no children	Adults with children		Retiree households
Average household income, 2003 (£'000)	29.17	39.44		10.10
Proportion of consumption expenditure on local goods and services	0.453	0.461		0.413
Proportion of total expenditure on local goods and services	0.260	0.258		0.356
Extra household income in economy following population growth (£'000)
Scenario 1	9,849		7,502	1,873
Scenario 2	20,807		0	0
Scenario 3	0		28,140	0
Scenario 4	0		0	7,203

 

6.3.6 Table 6.6 indicates, in aggregate terms, the economic gains associated with each scenario.  The effects are smaller in magnitude than might be anticipated.  The largest benefits are associated with Scenario C where it is assumed that the population growth consists entirely of households with children.  The extra consumption of these households is shown to result in an increase of £4.516m in terms of factor income in the region and 189 new FTE jobs.  The reason why this is far less than might be expected given the magnitude of injection (£28.14m) is due to a very high proportion of the injection being immediately lost from the Western Isles economy through taxes, transfers, savings and household expenditure on imported goods and services.  The next section investigates the potential gains from switching the pattern of consumption so that a higher proportion of household expenditure accrues to local businesses.

 

Table 6.6 Economy-wide effects of population growth (Figures in brackets indicate percentage change from base year levels)

Changes in:	Scenario A		Scenario B		Scenario C		Scenario D
Value of output (£’000)	6,944	(1.36)	7,245	(1.42)	9,836	(1.93)	3,432	(0.67)
Factor Income (£’000)	3,161	(1.20)	3,274	(1.24)	4,516	(1.72)	1,566	(0.60)
Employment (FTEs)	131	(1.32)	136	(1.37)	189	(1.91)	63	(0.63)

Switch in Consumption towards local goods and services

6.3.7 Comparison of the 1997 and 2003 Regional Accounts suggests that Western Isles households are spending a higher proportion of their consumption expenditure on imported goods and services than previously. This section shows the extent to which the benefits from net in-migration would be enhanced if the trend was reversed and households brought a higher proportion of their goods and services from local producers. 

6.3.8 In particular, the results shown in Tables 6.7, 6.8 and 6.9 below relate to the same four in-migration scenarios as presented above but in this case it is assumed that 25% more of the extra household income accrues to local businesses, while the value of additional imports falls by an equivalent value.  The 25% increase is spread between local sectors in the economy in proportion to the consumption patterns observed in the base year.  In modelling terms, the underlying “technology” matrix of the model is changed, and, as a result so is the magnitude of effects in the economy arising from the population growth.

6.3.9 Table 6.7 indicates the aggregate benefits of both population growth and the switch in consumption patterns.  In each case the benefits are considerably larger than those shown in Table 6.6.  For example, in scenario C where the in-migrants are households with children, an additional 56 jobs are created if there is consumption switching, as compared to the case where the reliance on imports remains as in 2003.

Table 6.7 Economy-wide effects of population growth and switch in consumption

Changes in:	Scenario A		Scenario B		Scenario C		Scenario D
Value of output (£’000)	8,992	(1.76)	9,379	(1.84)	12,740	(2.50)	4,444	(0.87)
Factor Income (£’000)	4,093	(1.56)	4,239	(1.61)	5,847	(2.22)	2,028	(0.77)
Employment (FTEs)	170	(1.71)	176	(1.78)	245	(2.48)	81	(0.82)

(Figures in brackets indicate percentage change from base year levels)

 

6.3.10 Concentrating on the two extreme cases - Scenarios C and D – Table 6.8 shows the distribution of employment effects between sectors.  In both cases the effect on the distribution sector is large. However, as shown in the second and fourth columns of the table, the pattern of effects differs between the scenarios, reflecting the different expenditure patterns of household types and consequently different indirect and induced effects generated within the economy.  Finally, Table 6.9 shows the types of jobs effects by population growth and the simultaneous switch in consumption patterns. Again, the pattern is slightly different between the two scenarios, with Scenario C having the greatest effects in terms of growth in professional and administrative jobs than Scenario D in terms of skilled trades.

Table 6.8. Sectoral Employment effects of population growth and consumption switch

		Scenario C		Scenario D
		Impact on employment (FTEs)	% Change from 2003 level  (%)	Impact on employment (FTEs)	% Change from 2003 level  (%)
1	Agriculture	4.4	1.79	1.7