Craig Dalzell: We can’t build an independent Scotland based on a timorous attitude


If this is a discussion document, it’s time to start discussing it.

THE GROWTH COMMISSION’S long-awaited report is finally out and will surely take some time to fully digest. It has been described as a discussion document and a starting point for the revitalised case for independence; not the final word on SNP policy or national trajectory.

In many ways, the report covers ground now very familiar to campaigners in the independence debate. We’re all now quite familiar with the deep and systemic flaws of the UK’s economic system especially its regional inequality which, quite frankly, is embarrassing when compared to neighbouring countries in Europe.

Also highlighted are the demographic challenges facing the UK and Scotland specifically (Scotland’s population has stagnated within the union. Had we not exported our populations and had instead grown at the same rate as similar small countries since 1980 then there’d be more than half a million more people living here than there are at present).

The UK’s reliance on consumer debt as a driver of economic activity is cited as a systemic risk – we’ve starting see the impact of austerity and the driving up of that credit bubble in recent months as people hit their credit limits and reign in spending. The economy is on the verge of grinding to a halt.

And, of course, Brexit is identified as a “clear and present danger” to the economic stability of Scotland.

So this sets the stage for a campaign that will be in some ways familiar but in many ways adapted to the changed circumstances that we now live in.

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The commission spends a good deal of time comparing Scotland and the UK to a dozen selected small countries ranging from the “Nordic” style economies of Denmark and Finland, through more “business friendly”, comparatively conservative countries like New Zealand out to the high inequality, low tax, hyper-capitalist, transshipment economies of Hong Kong and Singapore. No single model is envisaged for Scotland to copy but, much like Common Weal has sought to do, it is suggested that the best policies be taken as examples to inspire.

The report recommends that Scotland take a more pro-immigration stance than the UK currently does and suggests a package of measures including a simplification of visas and clear citizenship pathways to attract migrants both new and returning to the country. Quite frankly, it’d be harder to do worse than the UK’s disgusting and inhumane “hostile environment” policy and escaping this ideology will be reason enough for many to vote for independence.

It’ll be on finance that most folk will focus most attention on the report. Common Weal’s influence appears to have been felt in this area. Existing documents such as GERS are taken, as we have, as a reasonable starting point but with the significant caveat that they do not project beyond the singularity that is independence. The economic impact of creating more than 4000 civil service jobs to cover the work that is currently done outside of but “on behalf of” Scotland would result in several hundred million pounds per year in additional tax revenue.

There are areas where the report has definitely begun to push a lot harder than we did during the 2014 campaign. The debt and asset negotiation is an ideal example here. Back on 2014, the Yes campaign argued that both Scotland and rUK should take equal status as successor countries to the UK and should proportionately share both debts and assets. The UK disagreed and insisted that rUK alone would be the sole successor state.

To the rUK’s advantage this would allow it to secure things like its permanent seat on the UN security council and the by-then signed post-Brexit withdrawal and trade deals. It does carry the consequence, accepted by the UK, that rUK would inherit all of the UK’s debt. Scotland would start life debt free.

Now, the Commission goes on to make the case for an Annual Solidarity Payment to pay for our “share” of debt that the UK would be taking on – there’s a certain morality to play here as taxpayers in rUK should not be penalised for our leaving, though I’d argue that a one-off payment paid for by Scotland borrowing on its own credit line would be politically more sensible (and would prevent future political rows over the possible withdrawal of the ASP).

Similarly, pensions liabilities are stated to remain with rUK albeit with the caveat that it is likely that a transfer of liabilities would be asked for in negotiations – again consistent with research published by Common Weal over the past couple of years. Scotland will have to have a discussion about pensions in an independent country. Whilst existing payments are secure no matter what happens, the plight of the WASPI women and the fact that the UK’s pensions are some of the worst in Western Europe highlight the fact that the UK is simply in no position to claim that pensioners will be better off by voting against independence.

Other policies like the position on tax policy are interesting but need to be built upon. The report states that the UK’s tax policy is significantly flawed and Scotland should look towards building one suited for Scotland and points out that the “tax gap” in the UK (the gap between what is owed in tax and what is collected) amounts to many tens of billions per year. The work of Prof. Richard Murphy on the principles of a Scottish tax code appear to have been influential here and hopefully this will be expanded in future discussions.

READ MORE: Revealed: No plan for introducing Scottish pound in SNP Growth Commission report

There may be a temptation to effectively “copy and paste” the UK tax code into an independent Scotland, possibly in the name of “stability” but this should be resisted. Many independent analysed have concluded that the UK tax code is fundamentally broken and essentially incapable of reform and the opportunity presented by independence for a “clean break” and a chance at writing a new code from the ground up should be clear.

There is political advantage to doing this as well. The point of independence is a natural point to build a new country with a coherent narrative stretching across all areas of policy, including tax. Once that code becomes embedded, however, there is the risk of a serious political argument over even the smallest changes – witness the stramash over trying to change the rate of income tax in Scotland by 1p in the pound.

Unfortunately, the Growth Commission report falters significantly when it comes to monetary policy.

The plan stated is for Scotland to keep the pound unofficially (in a process often called Sterlingisation) without the currency union that was the plan in 2014. Mark Carney of the Bank of England has stated as recently as this week that currency union would be economically possible but would come down to the politics of the decision. It will always be the case that Westminster could refuse a currency union, no matter how compelling, and the realities of Brexit mean that it’s difficult to see how Scotland could be a member of the EU whilst being a minority member of a currency union with a country which has just left the EU. It seems politically unworkable.

But this isn’t to say that Sterlingisation is a “next best” option. Countries can use currencies this way, but there are significant limitations. Most of them are fairly small compared to the overall currency zone – Ecuador makes up about 1 per cent of the USA whose dollar they use, as does Monaco to the Eurozone and Lichtenstein to the Swiss Franc. Scotland has a GDP more like 10 per cent of the Sterling zone. This means that the Bank of England will be making interest rate decisions without the input from or obligation to around 10 per cent of its currency zone. This may introduce instability.

The impact to Scotland is more direct. An independent Scotland would not have control over monetary policy and would not be able to significantly diverge its economy away from the failed UK economic model that the report rails against without ending up with interest rates and other macroeconomic policies that have been built for an entirely different economy.

Couple this with an equally misguided fiscal constrain policy modelled on the EU’s Growth & Stability Pact which would target a fiscal deficit of not more than 3 per cent. This is only possible if a country has full macroeconomic control and has a sustained trade surplus.

My own research, published in our paper Scotland’s Data Desert, concluded that we currently have very weak data regarding Scottish trade – particularly with regard to the rest of the Sterling zone. Sterlingisation is made substantially easier when there is a trade surplus with the rest of the UK as this would result in an accumulation of Sterling in Scotland. If the trade in deficit then that means that every year, Sterling will leave Scotland and, given that it would lack the ability to print more, mesures would have to be taken to replace it.

If there is a substantial trade surplus with the rest of the world then Scotland could conceivably sell off, for example, euros and dollars to buy more but if this is insufficient or absent entirely then it could mean unsustainable borrowing in a currency that Scotland very much could end up running out of. This is a major risk to any economy which does not control its own currency.

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It’s easy for Germany to maintain a budget surplus when it has €20 billion arriving in the country every month. For other countries in the Eurozone – like France, Italy, Greece and basically the entire Eurozone apart from Germany – who import goods and services (thus export money) and lack the ability to adjust their exchange rates to rebalance trade the result has been severe financial strain.

The key to understanding this is to realise that governments do not run like household budgets – especially when they control their own currencies. When a government spends money in the economy, the economy grows and so does the government’s tax revenue. When they practice austerity, the opposite occurs. And when a government spends more into the economy than it takes out in tax, that additional money increases economic activity. Further, governments with their own currencies can never go bankrupt in that currency. They can always sustain their deficits. Your household can’t.

For a simple example, imagine you pay £2,000 in tax per year and receive £3,000 per year in healthcare. The government therefore has a budget deficit of £1,000 as it keeps you healthy. Let’s say then that the government decides to be “fiscally responsible” and privatises the NHS but also gives you a £2,000 tax cut. The government now has a balanced budget. But whilst you have an extra £2,000 in your pocket, you still need to buy £3,000 in healthcare – so now YOU have a £1,000 deficit.

This is why austerity has led to a credit economy and this is why the wheels are starting to come off of that economy. This is the reason why government budget surpluses have never lasted more than a couple of years in a row.

A Scotland employing Sterlingisation faces the same systemic risk – especially when coupled with that policy of fiscal restraint. There is a very real risk that this policy could accelerate rather than prevent the coming UK consumer debt crisis.

READ MORE: Grassroots welcome SNP plans to engage on economic plan for independence through National Assemblies

The report states that there may be an “eventual” transition to a Scottish currency but that transition itself is based on a series of “six tests” similar to Gordon Brown’s approach to adopting the euro. One of these tests, which are entirely political in nature, is to adhere to the fiscal restraint policy. Scotland faces the problem of being locked into a policy of Sterlingisation and permanent austerity which it can’t get out of because the policy itself actively prevents it from meeting the tests set for it.

In the case of Brown’s tests to enter the euro, these were set up more as a barrier to avoid having to join that currency union as they were targets to meet ahead of it. If the same situation is being set up with regard to a Scottish currency then it cannot be fairly called a “transition” plan. This should serve as a warning for proponents of an independent Scottish currency.

A far better idea would be the one laid out by Common Weal’s book “How to Start a New Country” which states that an independent Scottish currency would be built during the three year time period between a referendum and formal independence so that it is ready to use on day one of independence. If a link to Sterling is still desirable beyond this point then a peg such as that employed by Denmark with respect to the euro would be more appropriate and easier to change should it no longer prove to be desirable.

We can’t build an independent Scotland based on a timorous attitude towards currency and we certainly cannot build one which is focused on just trying to avoid jitters in “the market” or to keep the banks happy. We need to build an independent Scotland which works for all of us and especially works for those of us who have been failed by decades of UK policy.

We at Common Weal are looking forward to the ongoing discussions about the policies suggested in this report. There’s a lot to be constructive about but there’s also a lot that I obviously very much disagree with. So let’s take the opportunity ahead of us now to start that discussion and build the country we want to be.

Picture courtesy of Màrtainn MacDhòmhnaill