Written evidence submitted by Highlands and Islands Enterprise (COL0021)

Scottish Affairs Committee – Cost of Living – impact on rural communities in Scotland Submission from Highlands and Islands Enterprise

Introduction to HIE

Highlands and Islands Enterprise (HIE) is the economic and community development agency for the north and west of Scotland. We help build a prosperous, inclusive and sustainable economy across the Highlands and Islands, attracting more people to live, work, study, invest and visit.

The Highlands and Islands stretches from Shetland in the north, to the Kintyre peninsula in the south, and from the Outer Hebrides in the west to Moray in the east. It accounts for just over half of Scotland’s landmass (51%) but only 9% of its population. The region has a complex geography, incorporating the UK’s highest mountains, a fjord-like coastline, and around 100 inhabited islands.

The particular challenges facing Scottish rural communities in relation to the cost of living compared with other areas of the UK.

Rural Scotland accounts for 98% of the land mass of Scotland and 17% of the population. As a predominately rural region, 52% of the population of the Highlands and Islands live in accessible (12.3%) or remote (39.7%) rural areas. The region has the lowest population density in the UK, and one of the lowest in Europe.

Research has identified a number of factors negatively impacting or exacerbating cost of living in the Highlands and Islands, and rural areas more generally. Those living in these areas face acute challenges with structural disadvantage, higher-than-average levels of fuel and transport poverty, and poor and declining access to services. The economic structure of these areas results in lower- than-average wages. Coupled with higher living costs, there is a disproportionate impact on people, businesses and communities in rural areas from the cost of living crisis. This has been particularly marked in the more remote and island communities of the Highlands and Islands.

Structural Disadvantage - Rural disadvantage is a well-recognised form of structural disadvantage where peripherality and population sparsity are associated with constrained economic growth. In the Highlands and Islands, and in remote rural and island communities in particular, these structural aspects of disadvantage have been exacerbated, by Brexit and COVID-19.

• In June/July 2022, almost all businesses (95%) in the Highlands and Islands reported that they were being impacted by rising costs (with 62% being impacted to a large extent). Three quarters (75%) felt they were still being impacted by COVID-19 and 71% by EU Exit.
• Businesses in the Highlands and Islands were more likely to be impacted (to at least a small extent) by Brexit (71%) than those in South of Scotland (63%) or rest of rural Scotland (61%).

Access to services – More people in rural areas are outwith a reasonable drive time to key services (e.g. GPs and shops) compared to the rest of Scotland. This puts communities in rural areas at a disadvantage even before accounting for changes and challenges as a result of the cost-of-living crisis.

• Poor and worsening access to services – In 2020, 46% of datazones in the Highlands and Islands were in the lowest 5% of datazones ranked according to the access to services domain of SIMD (up from 40% in 2010).
• Online access is often presented as an alternative to in-person access to services in rural com- munities, but access to superfast broadband is not universally available. In 2021, within the

Highlands and Islands, a fifth of residents said they were unable to stream TV programmes/films without buffering, rising to 32% in Caithness and Sutherland, and 29% in Shetland.

Higher living costs - Work by Scottish Government in 2021 on a Minimum Income Standard for Remote Rural Scotland, concluded that the cost of living is higher in remote rural parts of Scotland than elsewhere across the UK. While this was driven partly by additional costs for food, clothing, household goods and holidays, the dominant additional cost is the cost of travel reflecting the longer distances people must routinely travel, particularly to work.

• A minimum acceptable standard of living in remote rural Scotland typically requires between a tenth and a third more household spending than in urban parts of the UK.

Reliance on transport – Average fuel prices (petrol and diesel) tend to be higher in the Highlands and Islands than for Scotland overall. Given the higher reliance on transport, transport costs for businesses and residents are higher, and they are more susceptible to increases in fuel prices. Transport poverty is also a factor with a lack of alternative options to mitigate the impact of increased fuel prices.

• 58% of data zones in the Highlands and Islands1 are classified as at high risk of transport poverty (where people don’t have access to essential services or work because of a lack of affordable transport options) (38% across Scotland overall). Only 4% classed as low risk (21% nationally).
• Reliance on cars is high for day to day living and working – a 2021 survey by HIE found that 87% of households in the Highlands and Islands are reliant to at least some extent (79% to a large extent), rising to 92% in rural locations. Reflecting this, car ownership is high – 44% own two or more cars, rising to 56% in accessible rural and 51% in remote rural locations versus 35% in towns.
• Research for HIE in 2021 identified that 93% of businesses in the region were reliant on road transportation for day-to-day operations (73% to a large extent).
• Road transport is the dominant mode for freight transport in the region and, due to the larger distances involved, costs for the region’s businesses are generally higher than elsewhere in Scot- land. Businesses based on islands or who sell on to islands from other parts of the region poten- tially have added costs for importing and exporting goods either by sea or air freight.
• Reliance on ferry and air services is high amongst households in island communities (68% and 36% reliant on these for day-to-day activities respectively). Similarly, a majority (71%) of island businesses rely on ferries and around one in five (17%) rely on air to a large extent.

Fuel poverty and access to appropriate and affordable housing – This is a constraint to both population attraction and economic growth, with high and increasing construction costs a disincentive to housebuilding. The region, and rural areas more generally, face significantly higher levels of fuel poverty and extreme fuel poverty, reflecting the nature of the housing stock and the high proportion of households which use electricity and other non-gas fuel types as their primary fuel – fuels that are typically more expensive than gas.

• The local authority areas in the Highland and Islands are amongst the seven in Scotland with significantly higher fuel poverty rates than the national average. Between 2018 and 2019, rates of fuel poverty increased in remote rural areas (from 33% to 43%), increasing the gap when comparing overall urban (24%) to overall rural areas (29%). This is prior to recent increases in fuel costs.
• 62% of business premises and 25% of domestic premises in the Highlands and Islands do not have mains gas supply compared to 15% and 12% respectively across Scotland overall, with ac- cess markedly lower in remote rural and island communities. These businesses and households

1 Based on Highland, Western Isles, Moray and Orkney only.

are dependent on electricity and other fuel sources and are therefore more exposed to price rises and price volatility for these fuels.

• Prior to the energy crisis, research for HIE in early 2021 found that half of households (50%) in the Highlands and Islands were already finding their homes expensive to heat, and one in six (17%) difficult to heat. Households in remote rural locations and islands were more likely to report their home as expensive to heat (56% and 59% respectively) and difficult to heat (21% and 22%).

Lower than average wages - While there is higher economic participation and lower unemployment, the structure of the regional economic base means lower levels of skilled employment, higher plu- rality of employment and lower than average wages. This impacts on their ability to respond to the cost crisis.

• In 2022, all local authorities in the Highlands and Islands had lower median gross weekly pay (for all employee jobs) than the Scottish (£528) and UK average (£533), apart from Shetland.
• Research on rural growth by The Rural Services Network in 2021 identified productivity con- straints: low wages and fewer jobs in higher-skilled/higher value sectors in rural areas, with a higher productivity gap compared with urban areas. Although incomes tended to be lower, living costs were higher and housing affordability a significant issue. Lower income jobs also appeared ‘below the radar’ in deprivation statistics which tended to be based on benefit dependency.
• Research by HIE in 2021, found that while job satisfaction amongst residents was relatively high, only around half reported being paid at least the real living wage or a fair wage for what they do. Plurality of employment is common (13% of residents reported having more than one job), more so amongst those in remote rural or island locations (both 17%). For around half, this is driven more by necessity than preference, particularly for those on the lowest incomes.

Business impacts – findings of the latest HIE Business Panel survey indicate the challenges of the cost-of-living crisis for businesses operating within the Highlands and Islands.

• Almost all businesses (99%) experienced cost increases in the year to October 2022, with these being substantial for most (83%). The greatest increases have been in the cost of raw materials, electricity and gas and transportation of goods.
• The increased costs of raw materials, transportation of goods and staff wages had a bigger im- pact on businesses in the Highlands and Islands than on those across rural Scotland overall.
• The main impact of cost increases was reduced profit margins (69%), followed by delayed or postponed growth plans (42%), being unable to set prices for the coming year (37%) and loss or reduction in customer demand (35%).
• Three quarters (75%) of businesses had delayed or postponed plans because of cost increases - typical energy efficiency improvements (36%) and new capital projects (35%) – more so in the Highlands and Islands than elsewhere in rural Scotland.
• The majority of business owners/senior managers (79%) reported impacts of the cost crisis on their own wellbeing with many feeling worried or stressed, working longer hours, struggling with work/life balance and reducing their own pay and benefits.

Sources:

HIE, HIE Business Panel, June/July 2021, June/July 2022 and October/November 2022 Scottish Government, The cost of remoteness, 2021

HIE, Rural and Regional Disadvantage in the Highlands and Islands, 2021 The Rural Services Network, Cultivating Rural Growth, 2021

HIE, Energy Cost Impact Research, 2021

Scottish Government, Scottish House Condition Survey – Local Authority Analysis, 2017-19 ONS, Annual Survey of Hours and Earnings, (table 7), 2022

February 2023