Common Weal director Robin McAlpine says the Growth Commission’s model of independence, where a foreign state controls Scotland’s monetary policy with no obligation to act in Scotland’s interests, is so alarming that Yes activists must resist it
WHO will set monetary policy in the Growth Commission’s Scotland? From this question spirals an alarming vision of our future.
In the proposals Common Weal has set out Scotland would get its own currency and a central bank; monetary policy would be set domestically and democratically.
Under the flawed but suddenly unfairly-maligned 2014 White Paper there would have been a currency union with the UK. The Bank of England would have made a formal agreement to set monetary policy for both rUK and Scotland.
This is a long way from perfect, but at least the Bank would be given a formal responsibility to think about the Scottish economy when setting policy and to act to protect that economy in an emergency.
But under the Growth Commission, Scotland will have neither a currency nor a central bank (what is being called a ‘central bank’ in the report is absolutely no such thing) so monetary policy definitely isn’t being set in Scotland.
And the Bank of England will emphatically not have any responsibility for Scotland. It will set policy for the rUK without a moment’s thought to what Scotland needs. In any case, because of the radical and experimental money supply system being proposed in the Growth Commission report, a central bank won’t be regulating money supply or effectively setting interest rates anyway.
Nope, Scotland will be reliant on the London money markets for its money supply. When Scotland needs to deal with liquidity issues it will need to go to London and buy Sterling on the commercial money markets at whatever price they agree to sell – there isn’t another provider.
So effective interest rates will be at least partly decided by money markets and no central bank will be there either to care about the state of our economy or to be able to do anything about it anyway.
From this falls out everything else in the report. The money markets are notorious for extracting everything they want from economies which make themselves too vulnerable. One almost constant refrain is that they require ‘restructuring’ from the economy concerned.
And make no mistake; that’s what we’re getting from the Growth Commission. The Commission twists language at will. “It’s not Sterlingisation” (it is), “it is a central bank” (it’s not), “it’s not austerity” (it is).
No-one including George Osborne actually says they’re going to impose austerity. What they say is that there is going to be a period of fiscal tightening in pursuit of non-negotiable deficit reduction imposed with a rigorous public debt cap.
That is exactly what the Growth Commission says; the dictionary definition of austerity. But worse, the Commission report contains a kind of ‘double-lock’ austerity.
First, the public sector in Scotland must contract in ratio to tax receipts. Second, the public sector must also contract as a proportion of the overall economy. These are expressed in a ‘below GDP growth’ rule for public spending and an absolutely non-negotiable promise to reduce the gap between tax income and public spending (but without tax rises).
So, if Scotland were to close tax loopholes for multinational companies who currently evade tax in the UK, Scotland would not be allowed to spend it because that sudden injection of revenue would be higher than economic growth.
But if the Scottish economy went through a period of ‘wageless growth’ (as the UK has over the last decade), it couldn’t spend any more money either because the economy would be growing faster than tax receipts.
Any way round, at the end of the Growth Commission’s austerity period the Scottish public sector would have shrunk as a proportion of the overall economy. This is 180 degrees the opposite lesson of that coming from the Nordic countries and runs counter to most of the world’s current economic development thinking.
So why do it? Because the money markets would demand it. Exactly like a Latin American country in the grips of the IMF, we’d be going cap in hand to money markets for all our money supply so, smelling our weakness, they would extract every concession they could.
I believe that this period of austerity would only be the start – and there’s some pretty clear evidence of it in the report. There are a host of apparently statutory commissions which it proposes must be set up. These monitor and advise government on almost all aspects of budget and economic policy.
These commissions would, naturally, be stuffed with big business and the finance industry. Their job seems to be to impose market discipline on Scotland on behalf of the money markets. And you shouldn’t believe they are advisory.
If one of these commissions proposes mass privatisation or a sharper, faster budget cut, or deregulation or tax cuts, the money markets would quite likely make adoption of these proposals by a Scottish Government to be a condition of lending.
People have been encouraged to think as if the economics built into the Growth Commission report are optional; this is not true. They would be the condition for a country without a currency or central bank to be allowed to use someone else’s money.
So what would actually be left for a Scottish Government to do after independence? Well, obviously it isn’t going to be doing any monetary policy. Or any fiscal policy because that’s been set for a period of austerity. And it would have little political option on core economic policy if unelected commissions are deciding it and money markets are imposing it.
That’s not all money markets would be telling government not to do. Forget your Citizen’s Income, your Land Value Tax, your land reform, renationalisation of energy (or anything else), large public investment in energy, housing or transport. Forget your fracking ban. These are exactly, spot on the opposite of the kinds of policy agendas that have been imposed on other countries which are run by money markets.
You can then add that the Growth Commission vision would prevent the government from changing tax and actually embed the UK tax code, would hand corporation tax and bank regulation policy to the UK and so on.
Even welfare reform would be impossible – with a public sector shrinking as a proportion of the economy, the I, Daniel Blake social security system would have to be left pretty well as is for another generation. Such is the imperative of austerity. Oh, and we wouldn’t be allowed back in the EU or even the EEA while we were Sterlingised – no central bank you see.
This vision sounds very much like so-called ‘technocratic government’, the name given to government when it is run by unelected bankers. The Scottish Government under this system would look dangerously like a puppet administration running only currently devolved policies plus immigration.
(In fact, there are no cases of banker-led policy I can think of where those devolved functions are not interfered with too – wait for the news that the markets are demanding greater ‘access’ to our NHS.)
So how do we get out of this dystopia in the Growth Commission vision? It dangles the carrot of being allowed your own currency one day in the non-specified future. But it makes the finance markets the gatekeeper.
One of the ‘tests’ for being allowed your own currency is to have met the deficit reduction targets. Which is to say not only imposition of austerity but the full completion of the austerity programme is a first precondition for being able to start talking about a currency.
Another test is that we will have built up a sufficient foreign currency reserve. But this is incredibly difficult to do if you don’t have a central bank – you’d presumably have to raise that reserve through revenue spending (i.e. from money that would otherwise have been spent on public services), because there are pretty strict ‘no borrowing’ rules. Twenty billion pounds worth by my calculation.
In both these cases the experience of Sterlingisation (increased borrowing costs putting pressure on budgets, no ability to build up reserves) would actually act against the ability to meet these tests.
Put simply, this report puts the economy of Scotland and the right to ever start our own currency into the hands of unelected bankers. And those saying ‘yes, but once we’re independent a government doesn’t need to listen to this stuff’? Well show me a country in austerity measures which has successfully faced down the will of the money markets.
Argentina? Panama? Ecuador (which is desperately trying to get out of Dollarisation but can’t)? Italy? Greece? Iceland is a bit of an exception, but then Iceland has its own currency and a central bank.
So the next time someone tells you that austerity is an ‘optional extra’ in the Growth Commission or that it would ‘only be ten years’, they’ve not understood the report. We would emphatically NOT be out of special measures in ten years (as the Growth Commission authors are admitting privately). This is a generation of banker-run Scotland with the austerity to go with it.
If you think I’m being excessively grim, let me reassure you that I’m leaving out the actually scary stuff so it can’t be quoted back at us.
But, to give you a flavour of those, let me set out one typical example. What the hell would Scotland do if there was a UK financial or economic crisis while we were Sterlingised. What would we do?
No monetary policy response, no fiscal policy response, no means to protect national liquidity, no ability to defend our economy in any way whatsoever. We’d be utterly crucified.
I completely understand that you will probably be confused here, possibly even mistrustful of what I’m claiming. How could this be the content of the report? How could this come to be?
The answer is, as always, that where the report ends up is determined by where it begins. And where it begins is from one primary belief – that the integrity of the British financial markets must be protected at all costs. “We have to protect financial services first” was exactly what Andrew Wilson briefed me.
The currency is to stay the same, along with banking regulation, corporation tax and the rest of the UK tax code etc – the entire architecture of British finance. Without the ability to propose a formal Sterling Union (which I think is the real end game of this report), everything else follows – money market monetary policy, austerity, technocratic government, the works.
And it explains something that really confused me. The report glibly states that we would have a ‘frictionless border’ with the UK (which is nonsense – the UK won’t have a frictionless border with ANYONE post-Brexit). How could they possibly write this? It’s when I realised they meant a frictionless border FOR BIG FINANCE that it made sense. Money will flow in (but mostly out) with no impediment or domestic control.
Because if the might of UK finance in Scotland is to be protected at all costs, then both the state and the wider economy must be put through emergency measures to knock them into the shape required by that finance system. Ten years of this would take 30 years to unpick.
This is the system used by only a tiny handful of countries – Panama, Ecuador, Lichtenstein, Montenegro. The biggest of them is only one per cent the size of their host economy; Scotland would be nearly ten percent of its host economy. Nothing of this sort or scale has ever, ever been tried before.
It doesn’t even matter if I’m right about all of the above; I’m right enough that these are the only things anyone will be talking about from now until polling day. It’s suicide.
There is a much less radical, less experimental and fundamentally less risky approach that Scotland could take. It is tried and tested and used by almost all other developed economies. It is based on a simple premise.
What you do is you build a financial system to support the economy rather than build an economy to suit the financial system. It’s really that simple.
In Scotland’s case we are a developed, exporting economy. What we need is stable monetary policy and reliable sources of financial investment, all controlled domestically and democratically.
So, in a swift and businesslike manner, you start a currency, build up a foreign currency reserve [LINK: http://allofusfirst.org/library/backing-scotlands-currency-foreign-exchange-reserves-for-an-independent-scotland/] and put monetary and fiscal policy in the hands of all future Scottish Governments.
You then put the new Scottish National Investment Bank at the heart of the nation’s economic development strategy (the couple of derisory mentions of SNIB in the Growth Commission’s report shows where it is really coming from), ensuring a strong source of investment in the domestic economy and minimising unnecessary exposure to foreign currency markets.
And for me you should also set up a national network of mutually-owned high street banks to ensure the stability of the retail banking market – supported by SNIB. Common Weal will be publishing proposals on how to do this very soon.
The links in the paragraphs above are to full (and readable) reports by Common Weal on how to do all of these things in line with standard European norms. This short (seven minute) film explains the whole process, or you can buy the book.
I don’t blame people one little bit for wanting to believe that the Growth Commission report is a step forward. I certainly don’t blame the brave souls who’ve tried to make sense of it and missed all the problems outlined above – it took me a while to piece it all together.
It is suspiciously long and the core case is buried in an absolute blizzard of totally standard neoclassical economic growth theory expressed in a kind of anodyne Prozac language; a few ideas good, some reasonable, some ‘I can’t believe you’re still trotting that out’ and quite a lot ‘seriously, MICHAEL HESELTINE???’ (who at times seems to be the Commission’s true hero).
I fear that we will simply not be able to repair some of the permanent damage done by this Charlotte Street Partners PR offensive. But we can stop any more damage being done. This is a discussion document, but let the discussion be swift and decisive so we can quickly begin pretending none of this ever happened.
Please, I beg you, understand what is actually in this report before you start calling it credible, well-researched or a step forward. I don’t believe it to be any of these. And what kind of damned independence is this anyway – rule by London markets via Charlotte Square finance sector Viceroys? Scotland as a pissy wee Crown Dependency?
Please, I beg you, fight for a Scotland which has the financial infrastructure of a proper country, one with some bloody self respect, and end this madness now.