The National newspaper in Scotland has the following article from me in its pages today:
A SCOTTISH tax system after independence should look very different from that used in the rest of the UK if Scotland is to be the successful independent country it can, in my opinion be. There are, however, some pre-conditions to this success.
First, if Scotland is to be a successful modern state then its politicians must understand what tax does in a modern economy. What this means is that they have to understand that tax does not pay for public services if a country has its own currency and central bank. If a country has both those things (and without them a country is not independent for all practical purposes, as the experience of Greece has proved) then whenever a government spends it creates new money that it has effectively borrowed from its own central bank. It's that new money that the central bank creates for it that pays for government spending in such situations, and not tax.
It has to be said, straight away, that this does not mean there is no need for tax. It's a fact that all governments with their own currencies and central banks can create as much money as they need, at will, and costlessly. But they can't do this forever. If they keep injecting money, without limit, into their economy a government will eventually create inflation. This, however, need not happen because it has the perfect tool available to it to reclaim the money it has created, and effectively cancel it out of circulation, and that is tax.
I stress, this is the actual reason why in a modern economy a government must tax. Tax does not pay for services. Instead, tax stops government spending creating inflation. It is absolutely fundamental that Scottish politicians realise this. If they do the foundations of Scottish independence and prosperity will exist; without such understanding they won't. The evidence is available: it was the lack of conviction on a Scottish currency, and the absence of clear reasoning on this issue, that probably cost the Yes campaign the referendum campaign in 2014. This cannot happen again.
That, however, also requires that it must be argued that the amount of tax that must be collected is not dependent on Scotland balancing its books, which is completely unnecessary in a modern economy, but is instead dependent on running the level of government deficit (or surplus) needed to run the Scottish economy at full employment with the low levels of inflation that all economies need to function. In other words, tax in an independent Scotland must not be a tool to beat a population into submission to meet the wholly artificial accounting goal of running the national bank account in balance, but should instead be a tool to ensure that the Scottish Government's economic, social, industrial, environmental and other priorities are achieved. Tax, in other words, can be used for achieving social goals and not as a constraint on doing so. This is the route to Scotland's real liberation.
Before anyone says this is not possible because bond markets will not permit it, I stress that this is not true. We now know that a government with its own currency and central bank that only borrows in its own currency can never go bankrupt. This is for a simple reason, which is that if a government is in this situation it can always create all the money it needs to pay its debts.
Understanding this means that an independent Scotland need never be beholden to bond markets, which we now know can, in any event, be neutered by the use of quantitative easing, which is the fancy name for a government buying back its own bonds using new money it has created for the purpose. The UK Government has already cancelled a quarter of its debt in this way, although Scotland has seen almost no benefit from that process, and this fact is almost never mentioned in the media.
With the understanding I have outlined Scotland can truly be independent, and make its own choices on its economy, tax and much else, but I stress that's only true if it has its own currency and central bank. If it has neither if those things then the situation is very different. If it uses the euro look to Greece for the way Scotland could be beholden to the European Central Bank and the International Monetary Fund for permission as to what it may do in its own country: that's no route to independence. And if it uses sterling the Scottish government would continue, as it is now, to be a glorified local council working within constraints effectively laid down by the Bank of England, with whom it would have to bank, and in whose currency it would have to pay its debts at interest rates effectively set in London. If anything, this is an option worse than that which Scotland faces now.
In that case when I say that understanding the true role of tax, and its relationship to a Scottish currency, is key to the prospects of an independent Scotland I really mean it. Get the Scottish currency and the role of its tax system right and Scotland has real prospects and a bright future as an independent state.
Shackle the economy to another country's currency and the Scottish people will be in perpetual servitude to that other country's bankers. There is a choice to be made, but only one viable option to select. The challenge is to get Scotland to realise just how important this issue is.
They add:
We'll have more from Richard Murphy on the tax system of an indy Scotland in the coming months.
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Brilliant! Thank you.
Thank you for this. I hope now that the MSM in the rest of the UK will pick this up and run with a discussion on the production of money. This economic understanding could transform politics if the public become educated in these ideas. We have waited for far too long to challenge the control of the press in promoting neoliberalism and its destructive ideology . I hope that this article in the Scottish press offers the breakthrough we are all aching to achieve.
“if [Scotland] uses sterling the Scottish government would continue, as it is now, to be a glorified local council working within constraints effectively laid down by the Bank of England, with whom it would have to bank, and in whose currency it would have to pay its debts at interest rates effectively set in London. If anything, this is an option worse than that which Scotland faces now.”
Given that you also propose that Scotland has its own currency and central bank, and (by implication) that rUK would continue to control sterling, issue bonds and cancel debt, it seems to me to follow that the logic of your argument (and in equity), Scotland could not realistically accept any share of the UK’s outstanding debt.
Presumably this is implicit in the 2014 public acceptance by the British Government that rUK (following Scottish independence) would be responsible for the whole of the outstanding UK debt (since it alone would control the currency and possess the sterling central bank, it would carry both the consequential assets and liabilities). I would be interested in your comments.
Why shoukd Scotland accept the debt when it ran a surplus for decades?
I am not challenging your argument, merely attempting to clarify the implications. You will appreciate that any UK Debt passed to Scotland (in sterling, whether or not Scotland had its own currency) would have major implications.
It is important to remember that during the 2014 Scottish Independence Referendum, currency was probably one of the most critical (suppressed but important) issues for voters. Unionists made much of the argument that the international financial community would not look favourably on a new Scottish currency if Scotland had not accepted its “share” (however established- it was as mysterious as GERS, so I shall not go there) of UK debt. At the same time rUK wished to keep the currency and central bank entirely for rUK, and merely pass some of the liabilities to Scotland (the UK is an incorporating union, not a federation, which in any case makes much of this seem quite an odd arrangement).
It is perhaps worth reflecting on the irony that
It is a vital issue, I agree
The entire UK *already has* this system, and is not flourishing.
It’s *necessary* to understand how the public money creation, spending and taxation system works – but it’s not sufficient.
MMT is a description, not a prescription – so we can proceed just as we are, ignoring the potential for good that our money system gives us, or, instead, use MMT as the road map for the way out of neoliberal austerity.
Scotland having its own sovereign currency would certainly be necessary, but is definitely not sufficient.
We may have this system
But we behave as if we have not
And that means having it is pointless
I do not think your point stands in other words although your last comment is right, albeit you seemed to miss most of the reasons why it is important and not a foregone conclusion noted in the article
I understand how public spending is independent of taxation, that governments should use taxation to suck out excess money to avoid inflation, but could you tell us how that would affect the value of a Scottish currency or sterling for that matter. At the moment any currencies value is determined by currency speculators so a Scottish currency could get hammered if those people decided so. I remember how speculators forced sterling out of the EMR even though billions were spent trying to keep sterling in. Maybe this is the reason why the Yes campaign failed to win because it knew a Scottish currency would get hammered so fudged the matter by saying we would keep sterling. Lastly correct me if I am wrong but would not saving have the same affect as your suggesting taxation would have on inflation by sucking out excess money. For some time I’ve thought that governments should contribute to people’s pensions as a way of getting more people to save.
I have answered that in another blog this morning
I haven’t missed any of the reasons, and I completely agree with you.
Scottish independence without its own currency would be disastrous.
I just wanted to emphasise that the political will to actually put that financial system to good use would be vital, *in addition* to ensuring that they have that sovereign currency.
It’s all very well knowing that the earth revolves around the sun, rather than the reverse, but you still have to make the effort sail to India, or fly to the moon!
I entirely agree on that point
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Hello Richard I found your article about currency most interesting but I do feel speculators if given half a chance perhaps with the support of various countries could undermine a Scottish currency or any country willing to pursue your economic ideas. Lastly you didn’t reply to my idea that governments should contribute to people’s pensions to encourage saving and suck money money out of the economy to avoid inflation.
I have answered why speculation won’t work
Re pensions, there are four problems:
a) We don’t need savings; they serve no economic purpose
b) We have a glut of savings already
c) Only the better off save. Why should they be subsidised?
d) Many savings are inflationary – as we are seeing with asset pricing
Hello Richard I am sorry to labour the point but you seem to take a bad view of savings,you maybe technically and factually correct in what you say, for example we have glut of savings but that’s because we’re not investing. This is what Keynes said basically when the free market fails to invest government should intervene with public works etcetera. As for the better off saving , I don’t class myself as better off but without savings I would not be able to afford the things I want also I read yesterday that people on average incomes need to save for ten years to get deposit for a house so again why do you have such a bad view of savings?
There is almost no link between savings and investment
Investment is usually funded by credit
Banks never lend savings
Savings are savings, don’t confuse them with anything else
Most are because society does not manage risk well or because assets are over priced
Thank you for sticking with me over the matter of savings, it seems me and everyone else’s common sense view of how economics works is not how the real world works. But agreeing doesn’t change the fact that I and everyone else could not buy the things we want without savings, for example banks won’t lend mortgages without a large deposit. Which even the well off struggle to afford so ordinary people would never be able to buy the things they want or if they did be charged exorbitant interest rates. Lastly could you give us examples where your ideas are being used or do you want Scotland to test out your ideas like they did with the poll tax which I think they won’t take kindly to,
I do not dispute there is a personal benefit to saving: I save
But that does not mean they make macroeconomic sense
Even less does it mean that we need to subsidise them
Let battle commence!
When mooted by your good self, Corbyn and his shadow chancellor seemed scared to sign up for this at the UK level because of the certain media reaction. I’m certain the responses to your National article that will appear in all the other Scottish media outlets will be even more fevered.
We have about 2 years to educate the media, the public and, most importantly perhaps, the politicians. To do that, it might be useful to identify economists working in Scotland who are supportive of your views and would be prepared to assist. Do you agree?
I’ve made a vague attempt at this, by looking at academic publications, but failed miserably. As I’m sure you know, most academic output is focussed on the nitty-gritty.
Perhaps, with the help of your like-minded colleagues, you could assist in this venture?
I agree
But others need to do the leg work
I only have two legs
No legs required – I was just hoping that you, or any of your regular contributors, already know who might be sympathetic up here in Scotland.
Excellent piece this.
And I’m guessing that given the EU wants countries to sign up to the euro, then they’d probably insist Scotland couldn’t be a member in it’s own right after leaving the UK if they insisted on having their own currency.
Bonus!
This rule has not been enforced
Excellent piece.
As a sidebar the current UK government sees the deficit as something to be avoided but, i think you rightly point out, most of that debt is in fact in pension savings.
Has anyone ever calculated what the debt should look like if we all had a decent pension to look forward to and that would at least, in some proportion, give us a guide to what the real deficit should look like?
Instead of getting excited about a number that in fact we need to support our pensioners?
I have argued we need more debt
Given the growth in the number of pensioners this is undoubtedly true
Ok then. We’ve got our act together and there’s an indyref2 circa 18 months time. More folk are positive and convinced by the currency etc proposals and we’re on the cusp of a majority yes vote.
Then bang. On the eve of the vote or in the run up we get a repeat 07/08 crash.
My fear is that, that scenario would impact on positive vote scupper Indy for long time, for too many folk would stick with and feel that they can rely on the devil the know.
I can almost feel a certain section of our country hoping and praying for an 07/08 crash.
That’s called risk
But Wullie, that has nothing to do with what Richard has suggested and his suggestion would it e affected by stock market movements.
In fact a Scottish Government with its own currency could invest heavily in renewables, cover the risk of when oil will run out, create or boost the economy by becoming a nett energy supporter and end up like Norway with more money than it knows what of do with.
It just needs leaders with vision to get on with it.
Should say “would not be affected”
Aye, and along with that vision they have to consider and work over as many ‘what if’ scenarios they can think of ready to counter possible nasties. They need a team that can counteract quickly. Any hesitation, no matter what the problem is, will be seen as weakness.
Should have also said “nett exporter of energy”.
Of course you are right they would need to be prepared (as much as possible) by all the what’s (preferably before announcing their plans, not like the current government of only realisng afterwards!!).
[…] proponents of Modern Monetary Theory like Richard Murphy or Steve Keen propose a very different story about money and […]