A little dust has settled on the report of the Scottish Growth Commission.
Some unionists are trying to say the growth numbers don't stack: on the basis of the austerity that the Commission promises Scotland that's an easy thing to do, because they don't. They would if Scotland was to have its own currency, as most of the countries that the Commission makes comparison with do. But that's not the route it has chosen. The unionists will have a field day as a result. What they do not realise, of course, is that they are conceding my case, that Scotland could have a fantastic future if only the right policies were chosen.
Some, like Kevin Hague, seem as determined as ever to talk Scotland down. It's hard to understand his perpetual desire to rubbish the country he claims to be so interested in.
Others with unionist bias, like the Fraser of Allender Insititute at the University of Strathclyde, which is far from objective on this issue, simply gloat. They had this to say in their commentary:
The report's assessment of Scotland's public finances make sober reading.
In a welcome move, which hopefully dispels any remaining myths around GERS, the authors take the GERS numbers as the appropriate assessment of Scotland's current fiscal position.
As, perhaps, the main proponent for the argument that GERS is not a true and fair measure of the Scottish economy, which is objectively true, I find this disappointing. First, this was not the moment for pettiness associated entirely with unionist argument. Second, their conclusion is entirely wrong. In the absence of better data what were the Commission meant to do? The Fraser of Allender should concentrate on improving the data rather than defend poor approximations.
But it's where the Fraser of Allender go next in their analysis that is telling. They say:
Unlike in 2014, the analysis that follows revolves around a plan to balance the public finances rather than documenting a list of spending priorities.
And depressingly, this is accurate. To be blunt then Scottish Growth Commission is not discussing growth, sustainable or otherwise in its report. There may be a great deal of interesting verbiage to keep the likes of Kevin Hague distracted, but the reality is, as I have explained, that the whole report is about money. Or rather, it is, even more depressingly, about how to balance the books. After imposing an effective limit on borrowing for investment the Commission then does not just plan austerity to balance the budget, it actually plans to run a surplus for years to reduce debt. Voting for independence on this basis would be to chose to adopt the very worst of the economic policies of the Gordon Brown and George Osborne, combined.
It's almost unfathomable why this has been done. But not quite. I note what Pat Kane had to say in The National (for those not familiar with it, the paper in Scotland most inclined to independence) yesterday. As he noted:
Common Weal's transition model assumes that a currency (and the other institutions of indy) can be announced on day one after the vote and constructed in full view of global scrutiny over a three-year period. By contrast, the Commission authors I talked to are ostentatious about dealing with what one of its contributors described to me as “the real world, sans unicorns and magic money trees”.
As he added:
This is robust, substantive stuff — what citizens capable of indy should be up and ready for.
I agree with that last point. But let's also wonder why the reference to the magic money tree (which is, of course, really a reference to modern monetary theory) made? I would suggest that it is precisely because the Common Weal approach does adopt an MMT analysis, because it is influenced by my White Paper on tax. In that I argue that:
If Scotland is to have a sound tax system then it must be based on economic reality. It is widely believed that tax is necessary to pay for government provided services. It has, however, recently been realised that this is not the case. This is because all government services can in principle be paid for either by a central bank creating new money or by quantitative easing (‘QE') operations (which amount to much the same thing).
This understanding is critical to the design of a Scottish tax system. What it demands is that Scotland must have its own currency from the day it becomes independent. This is because of another critical consequence of the understanding of tax and money, which is that a country with its own central bank and currency cannot go bankrupt.
What should also be clear is that a Scottish currency is also essential for the creation of an effective tax policy for an independent Scotland. This is because if a country has its own currency then there is technically no limit to what a government can achieve. There are, however, two practical constraints. The first is that the government does not try to create more economic activity than the economy can deliver. And the second is that they must tax sufficiently to cancel enough of the money that the government has created through its spending to ensure that its inflation targets are met.
The implications of this understanding are profound. First, a policy based on this understanding does not require that the Scottish Government balance its budgets. Secondly, this understanding means that the Scottish Government does not need to think itself beholden to bond markets or their interest rate whims. Third, in this scenario tax entirely ceases to be a mechanism that raises money to pay for government spending. Tax is, instead, a means of reclaiming the money that the government has spent into the economy as a result of that spending.
The Scottish Growth Commission wants to crush Scotland to balance the government's books. And the simple fact is that there is not the slightest reason to do so. Nor could Scotland suffer serious economic harm by not doing so if (and I stress the if) a deficit is run to create full employment and strong investment in the future.
This is the route to real growth.
The Commission is offering austerity.
There are, then, three options on the Scottish agenda right now. One is to stay put and suffer economic policies designed solely for the benefit of the south-east of England. That is the unionist argument.
The second is the Growth Commission approach of independence to crush the life out of the economy with the pointless intention of balancing the new countries books, which is wholly unnecessary.
Or third, there is the Common Weal approach, which seems to me to be the only viable option Scotland has, and which has the advantage of being based on economic reality.
The unionist approach will be rejected because it will be associated with Brexit soon, and all the dire consequences of that for Scotland.
The battle then is for the way in which the independence campaign must progress. And that comes down to money - and quite literally whether Scotland can make its own, or not. The success of not of independence will rest solely on this issue are the end of the day. Only a free Scotland, with its own currency, can deliver the growth that the people of Scotland should enjoy. Until this is appreciated and resolved nationalism will be in a difficult place, into which it has been put by the flawed neoliberal economics of this Commission.
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Absolutely on the point – as you say, the only point – at issue on the economic front for the independence of Scotland. The Growth Commission has turned out to be a catastrophic misnomer. The result has been an Austerity Report which would just strangle economic growth and pile up – not improve – social and employment problems. The two real howlers are accepting the nonsense of the GERS figures (repeating in even worse form one of the key errors of 2014) and making comparisons (rightly) with small independent nations’ economies and then proposiong the one major shackle which affects none of them – a ‘foreign controlled’ currency. One despairs. This dangerous rubbish must be stopped – and, at the very least, a Scottish Currency – from day one – must become the leading objective.
We know a country with its own currency cannot go bankrupt. However there are consequences if the markets lose confidence in the currency. The Turkish lira is the most recent example (and there are a long long list of examples in recent years) where interest rates balloon due to the currency being in free fall. Who knows with Scotland but an independent currency does not neccessarily provide economic stability and prosperity.
Do you really think Turkey and Scotland are really comparable?
Think about it for a minute
You are clearly excited by Scotland’s potential as a “test case” for peoples QE . The point being it isn’t enough just to say a government cant go bankrupt because it has a fiat currency. Economic problems manifest into the exchange rate and borrowing costs very quickly. I use Turkey as an example of this not as a comparison to Scotland.
I have not suggested any such thing
I am keen on Scotland using the capacity a government has to create currency at will to deliver gainful full employment which is always the way to a) deliver growth and b) balance budgets at c) low inflation rates
If you have a pro0blem with doing that, why?
And how do you suggest it might be done if the private sector will not create the demand and prefers to save, as is usually the case?
Why aren’t they comparable?
Both would have free floating currencies, both are on the fringes on the EU. Except Turkey would be in a much stronger position than Scotland as it has a GDP 4.5 times bigger, and debt to GDP of only around 30% (and Scotland can be expected to take it’s share of the UK’s 85% debt to GDP). Turkey only has a budget deficit of 1.5% as opposed to Scotlands 6%.
So why would Scotland be any different to Turkey? Economically Turkey is in much better shape than Scotland.
What do you think will happen if Scotland has a new currency, lets call it Scottish Pound (SCP), intially at 1:1 with GBP? Do you think it will weaken, strengthen or stay the same with GBP?
Scotland will lose the money from the Barnett formula, have a massive budget deficit, have little in terms of currency reserves and you are suggesting they print more money to pay for spending. What will that do to the SCP and Socittish inflation?
If you really think an unstable, now near dictatorship that is often close to external and civil war is in any way akin to Scotland which will be an intensely power rich and stable country with the highest energy resources per head of population in Europe then I suggest you have no power of analysis in your armoury and it’s not worth debating further
I think you are avoiding my questions. Every country is different and has it’s issues, but you cannot just claim that Scotland will be different and give no reasons.
For your information Turkey has a secular democracy, if imperfect, and his on target to produce all of it’s domestic energy from renewables by 2020. It already produces far more renewable energy than Scotland, and has a far greater capacity for expansion.
So I ask again why Scotland, with a much larger budget deficit, larger debt to GDP, much smaller GDP, aging population, etc be in a much better position than Turkey?
What would happen to the SCP once it is launched? Do you think it would remain at parity to GBP, especially if the Scottish government continue to run large deficits and print money as you suggest? What would happen to inflation?
On this I am with the growth Commission – there are ample countries Scotland is like
Turkey is not one of them
You list some reasons why and there are ample more – as I mentioned
Respectfully, I suggest you stop waiting my time
“….. there are consequences if the markets lose confidence in the currency”. This comment has the merit of going to the root of the matter: confidence. ‘Prima facie’ could it be the case that the Growth Commission’s perspective was informed largely by precisely this fear about ‘confidence’ in the policy to be offered, in the public mind?
Rather, I would ask a more basic question, since I think it may prove revealing – and worth exploring; what is the authoritative source for the Growth Commission’s understanding of the functioning of human psychology in this financial environment? Given their painstaking analysis across the board, I assume it isn’t just ‘intuition’? Could it be that the authority for this fundamental judgement about psychology the Growth Commission settled for, is an economist (or economists)? If so, whom? If so, why?
For the sake of clarity, I should observe that I counted the term “confidence” in the Report; it is used 14 times in the Growth Commission Report. It is used to state, endorse, encourage (whom – themselves?); but I could not precisely identify what specific threat they thought would otherwise reduce confidence. It simply hovered in the background, like fog.
What was it Roosevelt said in his 1932 inaugural address? “We have nothing to fear, but fear itself”.
Unfortunately we now live in an age of Tweets and Fog (that we create for ourselves)
🙂
Nothing to add to that, a full and comprehensive analysis, with the benefit of pointing the way forward.
I just hope some in the SNP, (MSP’s, MEP’s, MP’s, Members) and are reading this. Supporters of independence should email this to their SNP representatives.
“The report’s assessment of Scotland’s public finances make sober reading.”
or, in English,
“The report’s assessment of Scotland’s public finances MAKES sober reading.”
If the Fraser of Allander Institute cannot distinguish between singular and plural what does it say about the rest of their figures?
I think we can ignore that
The Fraser of Allander Institute (FoAI) using the report to try to bum up their own importance and their own political agenda is no surprise. The principle of ‘garbage in, garbage out’ will always hold though. Thus the Fraser of Allander Institute pointing out the Growth Commission report is based on GERS only highlights the Growth Commission report is based on ‘garbage in, garbage out’.
The FoAI’s allies though in the pro-unionist sphere will of course lap up the FoAI response. Hopefully anyone with a more questioning attitude will see the FoAI response for just what it is.
The GC seem to have happily given the upper hand to the unionists. They can sit back and tell people that finally the SNP have bought into their neoliberal approach.
The only thing that is up there with unicorns is the idea growing an economy whilst trying to achieve a government surplus.
The video of Andrew Wilson talking about fiscal responsibility just looked like an invitation to predatory bankers to come to scotland and make merry.
SNP need to go away and do some thinking. I really hope peole voice there displeasure at the coming conference.
Time to back commonweal
I agree
[…] The future of Scotland will be decided by money http://www.taxresearch.org.uk/Blog/2018/05/27/the-future-of-scotland-will-be-decided-by-money/ […]
I recall that Scotland exports more, per capita and in absolute terms, that any region of the UK other than London and the Southeast.
If this is true – and, especially, if it is true under a national austerity policy which is intentionally suppressing productivity – then almost any growth policy, even a flawed and inept one, will yield economic growth, rising living standards, and credible tax revenues.
To what purpose those tax revenues are put is another discussion: but ‘credible’ need only mean that that the monetary expansion is accompanied by real economic growth in a state that *can* fund services and build infrastructure that creates real economic value. Bluntly, tax revenue only needs to give a reassuring impression of competence, and not be a rush to print currency into a contracting and unproductive economy.
My question is on process now, who gets to decide which of these options and how do we get the third one on the table. I know the report is for debate, initially within the SNP, but will we all get a say and ensure that all options are on the table…?
That’s for others to decide
Sir,
You dismissed the questions of others because they cited an example that wasn’t on the Growth Commission list.
So could you expound on the example of Denmark?
It is very similar to Scotland in many respects. It is a Northern European democracy of about the same size and level of prosperity. Scotland and Denmark have many major trade partners in common. That plus the geographic proximity indicate that they are probably exposed to broadly similar risks of exogenic shocks.
Most importantly, Denmark has one major trade partner that is considerably more important than all the others, with which it shares a border. Just like Scotland vis a vis the rUK.
Denmark’s central bank finds that in order to manage its currency, it needs more the equivalent of more than £55 billion in reserves. Even the most rosy projection of how the divorce settlement might turn out leaves Scotland with only about 1/5th that amount available for the new central bank.
So why do you think that Scotland could do what Denmark does?
How do you know Denmark needs those reserves?
It has them.
Does it need them?
Remember, the U.K. does not find any such proportionate need
And Singapore is an obvious outlier
So go to facts: what is your case, other than Denmark has them?