Thursday, 21 February 2013

Independence Means Having Economic Control - Or Does It?

One of the complaints about the Referendum campaign which has been most often stated, is the lack of information available to the Scottish public. That has certainly been true about some of the most important issues with which Scots are going to be faced, two of which are the currency in an independent Scotland and  membership of the EU. The first of those issues has now been tackled, at least by the Yes side in the campaign, with the publication of the report by the Fiscal Commission Working Party. It is the kind of document which has been missing and which provides the kind of information on which arguments can be based. Despite the detail contained in the Report, it has been almost completely ignored by the media and has not been exactly prominent in the statements emanating from either side of the campaign. I can understand the No side ignoring it, because there is little contained in the details which will provide Unionists with the kind of negative material which normally fills their campaign. Alf Young, writing in The Scotsman, is about the only Scottish journalist who has given the Report any attention and to date, the Yes Campaign has hardly mentioned it at all. While the Working Party concludes that in the event of a Yes vote, any new Scottish government would be best advised to continue to use sterling, "immediately post-independence", it has some useful things to say about a Scots currency.

In June last year, I produced a blog stating why Scots should have their own currency, something which I have always advocated and which was the policy of the SNP for many years. Professor Gavin McCrone made the same argument but until the recent report from the Fiscal Commission Working Party, there has been little material from the academic world. Now Professor John Kay, former economic adviser to Alex Salmond and currently visiting professor at the London School of Economics, has produced a paper arguing in favour of a Scots currency in the event of a Yes vote. I covered much of the ground in the blog in June 2012 but both Professor Kay and the Working Party emphasise some of the most important factors in favour of having a Scots currency from the outset.

The message given prominence by the SNP and the Yes Campaign, is that Scotland and the rUK are moving in opposite directions, in terms of providing universal care for those most in need, which will mean that Scotland will be a much fairer society than that covered by the rUK. It is argued that Scotland needs to be independent if that "fairer society" is to be established because the rUK has no interest in pursuing such a goal and, even if it would like to create such a society, it is incapable of achieving it. There are those, even among Scottish Nationalists, who will dispute such a claim but that is for another blog. The important issue is that the leadership of the SNP and the Scottish government, are economic nationalists, arguing that the reason to achieve independence is to improve the economic and social life of Scotland and its citizens. It is an argument endorsed by many of the leadership of the Yes Campaign, some of whom have gone to great pains to emphasise that they are not Scottish Nationalists and that the only reason they seek independence is to improve Scotland's economy and society.

That is a fair enough reason to want independence but it immediately raises the question of how it will be achieved and suggests, at the very least, that control of the Scottish economy will be a prerequisite for any Scottish government presented with the task of creating this "fairer society". In fact, when Nicola Sturgeon set up the "panel of experts" tasked with outlining Scottish values, in January this year, she said, "The only way to guarantee social justice in Scotland is to have control of the powers needed to deliver it". I couldn't agree more but I seriously question how a Scottish government can have control of the economy and, at the same time, relinquish control of the country's currency and monetary policy to the central bank of a neighbouring country. More to the point, it is a central bank which has been in control of the monetary policy which has ensured that for the last thirty years, Scottish growth rates have been lower than those of not only the rUK, but of those countries of comparable size in the EU. With a history like that, is there any reason to suppose that future control would provide a different outcome?

Before answering that question, it is worth looking at what the Fiscal Commission's Working Party has said about a Scots currency. Unionists have tended to sneer at and scorn the very idea that a country the size of Scotland, could support its own currency. However, the very first point made by the Fiscal Commission is, "The economic area of Scotland is large enough to support its own currency." It went on to say, "By international standards, Scotland is a wealthy and productive country" followed by, "Even excluding oil output, GVA per head of population is estimated to be 99% of UK average and is highest in the UK outside of London and the South East." Irrespective of Scotland's natural wealth, the significant factor which has determined economic activity in Scotland, is the fact that Scots have no control of the economic levers which determine economic outcomes, thus annual growth in Scotland has been 2.3% as opposed to 2.8% in the rest of the UK. The UK is now the 4th most unequal country in the developed world, with inequality increasing over the past two decades, so that 1 in 5 children in Scotland live in poverty and 20% of young Scots are unemployed, double the figure in 2008. The proposed cuts in welfare spending will take another £210 million out of Scottish pockets while the Westminster government intends to spend another £350 million on the next stage of Trident.

Economic Nationalists don't have to look far therefore, for good reasons to pursue Scottish independence but if Scotland retains sterling, Professor Kay points out, "Scotland is 8.5% of the monetary union and the rest of the UK is 91.5%, you're not going to play an equal role - to put it mildly". The Fiscal Commission sets out a number of conditions which would have to prevail if such a monetary union was set up. They include the following:-

* Scottish government has a formal input to the MPC of the Bank of England
* Interest rates set to promote price stability across the sterling zone
* Financial stability ensured across the sterling zone on a consistent basis
* Joint fiscal sustainability agreement to govern level of borrowing and debt within sterling zone.

A single Scottish government representative on the MPC is hardly going to ensure that Scottish interests prevail and, when the other conditions concentrate on maintaining financial stability and control of interest rates across the sterling area, there is no room for Scottish policy to diverge from those which satisfy the economic aims and objectives of the rest of the UK. The conditions set out by the Fiscal Commission completely contradict the claim made by Finance Minister John Swinney, that, "it (retaining sterling) will offer flexibility for the Scottish government to develop its own taxation and spending policies to boost growth and address inequality." Professor Kay summed it up when he said, "You start asking what independence is about..."

The economic Nationalists who currently lead the independence campaign, really need to start asking that question, if for no other reason than whether or not their aims can be achieved as long as Westminster governments and the Bank of England are left in control of the Scottish economy after independence. The Fiscal Commission claims that Scotland's retention of sterling would be good for both Scotland "immediately post-independence" and the rest of the UK. If that proves to be the case, why would either the government of a newly independent Scotland or the rest of the UK, want to change to another currency? If the Fiscal Commission's conditions are met, little or nothing will be changed in terms of Scottish economic performance, which undermines the independence case for economic Nationalists. What price then, the demand to end the inequality that exists in Scotland? The Scottish economy not only needs to perform better than it has in the past thirty years, it needs to diverge from the economic performance of the rest of the UK. That is hardly likely to happen so long as there is a list of agreements which ensure there can be no divergence.