If I presume my Twitter timeline to be a reflection of what is happening in some areas of debate, then dispute on the usefulness of the Scottish government's GERS statement is raging again. GERS stands for Government Expenditure and Revenue Scotland. It is also the nickname of Rangers Football Club which is, of course, traditionally supported by unionists. I have commented before that I do not think this a coincidence. It betrays the original Conservative government objective for this statement when it was first created in the 1990s, which was to undermine the case for independence.
The GERS statement has been redefined since then. And I recognise that the methodology did improve.
And it is entirely true that the statement is now produced by the Scottish government itself. Unionists do as a result claim that if a nationalist government produced this data it has to be true.
No one does this more so than a blogger called Kevin Hague, who I see (because it's been drawn to my attention) has been having one of his periodic goes at me, whilst simultaneously producing great quantities of data which he suggests proves his case that Scotland is going to hell in a handcart, with or without independence.
I am not writing now to knock Kevin Hague. I have little taste for his style of debate. And I can't be much bothered to engage with a man who has stated (correctly) that GERS provides no indication of what the financial state of an independent Scotland might be, and then proceeds to base all his argument on the fact that it does. No one can win in direct argument against someone capable of being quite so illogical: they will persist with their illogicality come what may.
Nor am I writing now to address, yet again, the obvious failings in GERS as it stands. I have already done that on many occasions and nothing has, as yet, changed. So I suggest starting here, and here, and searching for more or following the links in those pieces if you want to know why GERS:
a) Understates Scottish income, by design;
b) Overstates Scottish expenditure by design;
c) Is prepared on an accounting basis that breaches fundamental rules of accounting;
d) Is based very heavily on non-Scottish data that was not designed to facilitate GERS;
e) Could not be made more accurate without there being a political will in Westminster to produce better quality Scottish data, which political will does not exist. Go back to my opening comment on the name to see why.
Instead I want to make clear why the arguments that Kevin Hague, and those with similar mindset promote are so irrelevant to this debate. This requires a little explanation.
The first thing to note is that Hague et al are technicians. They take data they are given and process it. They do not question it. They look for a seal of approval - in this case that of the Scottish government - and declare that is good enough for them and that anything that they might do as a result is sound analysis. I regret to say that this shows remarkably little understanding of almost any aspect of accounting or economics, although I admit that the economics profession is dominated by those who are similarly uncritical.
To be clear, no data has the objective quality that Hague et al apparently presume GERS has. All data is deeply subjective. What data we collect, how we collect it, how we process it and how we then publish it are all matters determined by subjective judgement. So, as I have pointed out, a decision has been made to not collect data on all the income attributable to Scotland. And expenditure that no one in Scotland has decided should be incurred has been attributed to it. These are subjective decisions. They distort the reporting. I stress, I am not arguing subjective decision making is wrong: it is a necessary fact of life. But when reviewing any data we have, then, to remember why it was collected; what the constraints are and what use it was intended to serve.
In this context the current political setup in Scotland has to be born in mind. The reality is that whilst Scotland has a parliament and has devolved responsibility for some issues, such as education and health, it has limited real revenue raising powers. In particular, some taxes are wholly outside the scope of devolved powers e.g. taxes on companies and wealth as well as national insurance and VAT (for now). Even the tax powers that are devolved are largely confined to making variation to rates, rather than to making any significant changes to tax base. Scotland is, then, very largely (by which I mean, for almost all practical purposes, entirely) dependent on funding supposedly supplied to it by the Westminster parliament, whatever the appearance might be.
What I am suggesting in that case is that whatever the veneer might look like, the Scottish government is for all practical purposes actually a devolved spending authority at present. Its ability to alter its revenue is simply too limited to alter that fact. And the constraints on its powers to intervene in the economy are so tight that it has little real chance to alter the economic well-being of the country if UK national economic policy is set to harm it, as it has been for many years.
And this fact (for fact it is, even if the SNP like to play along with the idea of limited devolved powers on revenue) means that the truth is that the Scottish government has about as much economic autonomy at present as an English country council. Indeed, given that English local authorities might raise more of their revenues themselves (albeit, again within heavy centrally imposed constraints) Scotland may have less autonomy.
In that case what is GERS for? It's essentially about showing three things. One is, by implication, the fact that the Scottish government is required to balance its budget. That is a legal requirement. Second, it is about then suggesting that Scotland does raise some taxes, although the actual figure is deliberately understated. And then, thirdly and most importantly for some (who happen to effectively control the process), it is about suggesting that Scotland is a burden on the rest of the UK and should be immensely grateful to England in particular for subsidising it so heavily.
In other words, GERS indicates that a management obligation - a supposedly balanced budget, that is designed to very largely remove all fiscal power from Holyrood - has been delivered. And it is designed to show that there is a deficit in Scotland on the basis of the arbitrary estimation of income and revenue arising in Scotland that is used, that is then intended to feed directly into the political narrative that Hague et al use.
That the outcome is absurd is apparent. As I noted last August, it is simply impossible that X% of the UK national deficit is produced by Scotland. If an accounting system produces such a ludicrous claim then it safe to say that the accounting system is wrong.
My point, then, is to ask why it is so wrong. How can it be that such a misleading statement is still in use?
Firstly, let's be clear, that's because it very much suits the UK government to make the SNP look bad. When there is no foreseeable chance of a Conservative government in Scotland for a long time to come, and every chance that there will be a Conservative government in London for at least five years, it's reasonable to presume that the bias will remain.
Second, it is unfortunate that as yet the SNP has not called GERS out for this reason. Instead of promoting it as reliable, as it has, it should be highlighting all its deficiencies and all the issues that should be reappraised to make it useful, it it is ever to achieve that status. But so far they will not do that.
Third, and worse, the SNP through its Growth Commission, has actually produced an endorsement of both GERS and the role of Holyrood as a devolved government that it imagines continuing well beyond independence as a result of the policy of sterlingisation to which they still seem to adhere, whatever good work Tim Rideout has done.
Fourth, then, it has to be understood that GERS seems to suit a mindset prevalent across the SNP / Tory divide that does, whatever is said in public, still seem to the think that austerity policies, based on externally imposed financial constraints created by London and imposed through the use of sterling will deliver. I can't explain why the SNP wants to subscribe to this view, but it appears it does. It will not only seriously harm the case for independence if it continues with it, by guaranteeing that the SNP will have to play on Hague et al's economic playing field if debate is to take place around such issues with existing SNP policy still in place, but it would also guarantee that Scottish well-being would be seriously harmed by an SNP government committed to such a policy if independence were to be achieved. I hate to say that, but the failure to challenge the culture of economic dependence on London implicit in GERS makes the SNP a massive threat to Scotland post independence right now. I hope for more enlightened times.
That enlightenment would require a number of matters to be appreciated. Let me list them, again.
First, if Scotland was independent - and that is the scenario I am really most interested in - GERS is of absolutely no consequence, even as a starting point.
That's because Scotland should, if it has any sense and any chance of real independence, have its own currency from, in effect, day one of being an independent state.
And it should have its own foreign currency reserves - which it could create by issuing its new currency which people would want to buy with their existing currency - providing Scotland with its reserves in the process.
And then it would want to run a deficit, because a growing currency with a need for currency to keep its economy turning needs a government that is willing to run a deficit to inject funding into the country. The likes of a Scottish Green New Deal will, in any event, require this.
After which, Scotland will both need and have a proper accounting system of its own in place at this time. This would be essential: no country can run without one. And the key fact is that international law not only supports this process, but it is increasingly intended to support its effective delivery.
So Scottish imports and exports would really be tracked, with VAT being accounted for. That is not the case now: there is no real idea what is happening on this issue.
And Scottish residence for tax law would cease to be as arbitrary as it appears to be right now, with Scottish tax authorities still not really in control of this process.
Whilst trade in Scotland will have to be properly recorded as such, with sales, expenses and profits all being properly locally recorded for declaration to the Scottish tax authority.
And because international tax law would apply, Scotland could challenge the transfer pricing abuse that is not monitored in the flows out of Scotland to England now, where overpriced PFI, loan charges, interest and rents flow south without any control at all.
Instead, rents would be taxed in Scotland, come what may, whilst interest charges might well be as well: those charging interest in Scotland might be required to account for them in the country as well.
The reestablishment of a real Scottish financial services sector - meaning that profits from this activity which are now recorded in London would flow back to Scotland - would also help.
And the result would be that the correction of the current mis-statement of Scottish financial income, noted by John Christensen and Nick Shaxson, would seriously change the balance of payments with the rest of the UK. Scottish finances would look very different as a result. What is now arbitrarily allocated to England will be Scottish again.
I am not saying there will be no deficit: I see no reason to desire anything but a deficit. But the point is that instead of accounting as a local authority, in a currency over which it has no control, and with no powers to really require that Scottish sourced income be recorded in Scotland in some quote crucial areas, Scotland would account as a nation, and have the power of a nation to enforce its own rules. And it would have its own currency.
And that is a scenario so unlike GERS as to make comparison meaningless.
Three final thoughts then as to what this implies.
First, the SNP needs to announce a plan to replace GERS as being no longer fit for purpose, come what may.
Second, the SNP needs to embrace the idea of its own currency and running deficits post-independence.
And third, it needs to make clear that its vision of Scotland post-independence is not as a continuation of what is happening now, or why bother? Playing with GERS suggests that somehow not much will really change, and that is a serious mistake.
Accounting is, then, deeply political. GERS is a statement about Scottish dependence. Of course those who want to belittle the country love it. It's time Scottish nationalist politicians of all allegiances realised that and got rid of it.
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Gosh, very well said Richard, and I think you are right about the SNP lack of ambition or vision – or perhaps even passion. They have spent so much time and energy moulding themselves into an establishment political party – I am not saying this was the wrong strategy, but – there has been little time and energy spent considering how to establish Scotland as an actual independent country. Their resistance to the idea of actual financial autonomy is a bizarre one, and demonstrates a lack of realism or ambition.
Someone posted a link to this short clip on BBC news, where the guest accidentally mentions the ‘massive’ Scottish economy, (approx 8% of the U.K. population and how much of the economy…?) when describing the hit to GDP a no deal brexit would have. So, it’s obviously known what the ‘worth’ of Scotland is to the uk economy, but everyone just happens to never mention it,,, or are we just a bunch of scroungers?
https://m.youtube.com/watch?v=6gJMoDEtkhE&feature=emb_logo&time_continue=92
Anyway, it still says nothing about an independent Scotland, but I can’t see how we can be the only country in history that fails so badly that we come begging to be taken back under Westminster rule. Never know, though, or we won’t ever know, until we try.
Thanks Richard, start the week as we mean to go on! At the weekend a short video of Bloomberg interview of Jim Rogers was doing the rounds of indy twitterers, much to our glee. He was an impartial advocate of Scotland running its own affairs. We need these little assurances among the tides of anti-independence mantras flung at us week in week out from all points of the compass which can have a wearying effect.
I have respect for our FM doing a job I know I’d fail on the first day. I am however doubtful of wisdom/motives of those advising her and even more so the influence of lobbyists at Holyrood who kick and scream to keep the status quo or at least slow down the rate of change of land reform, rent controls, council tax etc.
I guess we miss the bold risk-taking of her predecessor. Others who have been around the indy scene much longer than me may be able to think of people who could equally be known for both vision and gallus attitude. Time for some now folks.
Sturgeon has enormous political ability
I wish she had better advice
Richard states that he wishes that Sturgeon had better advice.
I agree entirely. Earlier this year I wrote to the Scottish Finance Secretary suggesting that he should get Audit Scotland to review and comment on GERS as so much contradictory comment results following the annual publication by the Scottish Gov’t. The response, from an economist on the Office of the Chief Adviser to the Scottish Gov’t stated:
The aim of the GERS publication is to enhance public understanding of fiscal issues in Scotland. GERS is an accredited National Statistic Publication. This means that it has been independently assessed by the Office for Statistics Regulation, and found to be methodologically sound, explained well, and produced free of political interference. Further information is available at:
https://www.statisticsauthority.gov.uk/osr/
As GERS focuses on public sector accounts it is not intended to be a measure of the
Scottish economy. The Scottish Government’s main measure of the economy is GDP, and information is published on this at the link below.
https://www2.gov.scot/gdp
However, we recognise that users have indicated that they would like more statistics on devolved finances in Scotland, and as a result the Scottish Government is considering introducing a new statistical publication, which would have a wider scope and report on all devolved revenue and expenditures. Unlike GERS, it would focus solely on the finances of the Scottish Government, local government in Scotland, and their associated agencies and bodies. It would not report on services provided by other UK Government departments either operating in Scotland or providing wider services on behalf of Scotland. Further information is available at the link below.
https://www2.gov.scot/Topics/Statistics/Browse/Economy/GERS/DevPFSCons18
The first paragraph is the usual bureaucratic response that “laid-down procedures have been followed” while ignoring the crucial question of whether these procedures are logical or whether the underlying source data is appropriate and has been consistently and accurately compiled, or indeed whether the basic purpose of the report makes any sort of sense (this response should be familiar to anyone who has had dealings with Ombudsmen). It is shockingly revealing that it claims to be “produced free of political interference” when GERS was openly designed by its author, former Scottish Secretary Ian Lang, to be a political weapon to undermine opposition to Tory governance by any other party in pre-devolution Scotland.
The second para reveals a shocking naivety: “it is not intended to be a measure of the Scottish economy” when everyone knows it is widely portrayed as exactly that by the media, politicians, commentators etc. This naivety, of course, could be construed as knowingly intentional, since GERS was originally developed precisely to spread disinformation under the guise of official-looking statistics and a Government imprimatur.
The final para is at least encouraging in that the Scottish Gov’t seems to acknowledge that reliable Scotland-specific statistics are needed. The mainstream media in Scotland has been pretty quiet about the setting-up, scope, and progress of the proposed new Statistics Dep’t. Does anyone have up-to-date info on this?
I’d suggest “technician” is rather too kind a description of “Hague et al” – ‘blinkered propagandists’ &/or ‘GERS fundamentalist Taliban’ are descriptions that IMV are closer to reality. Especially when you see/experience their online ‘antics’ which are less about debate than they are about deriding & bludgeoning ‘unbelievers’ into submission & silence & playing to a deeply ill informed & conservative audience of GERS faith believers.
I’d like to see some change in the net (and hopefully last) GERS
Every figure should have the source defined IE Holyrood or Westminster (By flag Saltire or union Jack) Additionally the type of data should be specified – that is actual collected data, estimate of Scottish apportionment (showing percentage allocated) or Survey (aka Guetimate) showing the percentage return of completed information.
Richard,
Always like your commentary on GERS.
If Scotland becomes an independent nation (hopefully) with it’s own currency (hopefully) how might it avoid being forced to join the Euro if readmitted to the EU?
That is the one downside I see of an independent Scotland joining the EU I would not want it to join the Euro in it’s current format (that needs a complete are-think).
To rejoin the EU it has to commit to joining the euro
But no one has been forced to actually do so….
Well, no one met the Maastricht criteria either! So the answer would be, commit to joining and never manage to reach the criteria then 🙂
No-one can join the Euro until their own currency has been in the ERM (Exchange Rate Mechanism) and had a stable exchange rate for at least two years. While a commitment to join the Euro is mandatory for new EU members, joining the ERM is entirely voluntary. No country can be forced to adopt the Euro because no country can be forced to join the ERM. It really is that simple.
I believe that Mr Kevin Hague sells dog food for a living.
He is also an aficionado of producing multicoloured graphs from data that is rubbish. Totally inchoate and as impenetrable as Gers itsel.
The UK has a handle on the input figures from Scotland or in theory it should. However these are skewed and incomplete.
It is the totally incomprehensible allocation the money Westminster spends , on whatever it so desires and is deemed to be for Scotland’s good. Like 9 % of HS2 costs, same % for Crossrail, Millenium stuff, Olympics in London, Hinkley Point 2 which in not needed for electricity generation but to hide nuclear weapons raw materials and weapons development costs, and of course the hidden subsidy on electricity prices in London and SE.
The list goes on and on.
If you are going to tell a lie, make it a big one and repeat it ad infinitum and nauseum.
The real sponger on Mother England’s teat is the SE of England
I am getting old and now realise the absolute piss take of a declared “national” expense to which Scotland must pay the 9% share of the expence, in this case a growing black hole.
The Student debt in England in Wales, which is not replayed and effectively written off, is a 9% allocation to Scotland by the Treasury. This is despite the fact that Scotland pays the Student fees for Scots in Scottish Universities.
Incidentally Scotland does pay the fees for E U nationals as EU member states give Scotland reciprocal rights.
We lose that on January 31st
Hi Richard,
Thanks for another excellent article.
I suspect that the SNP have trapped themselves into using GERS during the time when oil revenues made the figures look good.
They need to find an honest way of distancing themselves from them.
Oh I forgot the corker, the Defence Budget allocation which allocates to Scotland the highest % of cost relative to gdp in World.
They are just taking the piss
Agree with virtually all of this
BUT
To convince the voter yo vote YES & win Indy ref2
All talk of deficits has to be avoided most importantly sterling must be our currency.
Average voter will be scared of losing the pound. In the beginning at least £ must be the currency.
OK
Make it a month
Good on you Richard,
for consistently banging this drum so loud and clear. I have seen comparable debates emerge elsewhere among economists when nitwit technocrats from the Bureau of Fun Facts produce numbers to declare that , for example, California has “the 5th largest economy in the world”. Those that actually understand the subject know that California is so deeply integrated with the rest of the US that is impossible to realistically identify and measure as a separate economy.
That debate is largely academic and inconsequential. The Scottish example is not and you should be congratulated for identifying the the true nature of the GERS as a propaganda device that serves the purpose of suggesting (among other things) that Scotland is a burden on the rest of the UK and should be immensely grateful to England in particular for subsidising it so heavily”.
As a technocratic measure the GERS is flawed but it is not, as you suggest, sufficient to identify the technical errors or flawed assumptions. Its implications and ulterior purposes are just as interesting and to those that you have already identified we could perhaps add two more possibilities:
The very existence of the GERS (falsely) implies an existing degree of Scottish separation. Separately measured statitstics suggest that, to some degree, Scotland is already a distinct and self-determined entity thus undermining the desire for independence.
It is also worth considering that the EU, or more particularly, the Eurozone, has played an indirect role in this fashion for false reporting. It has developed a (cake-&-eat-it-too) culture of statistics that seek to attribute responsibility to EZ nations that have no monetary sovereignty and as such no real independence. They also have a variety of people from progressive EU commissioners through to George Soros who will happily point out why that is bullshit, but, they persist with an obvious double standard nonetheless. That sort of thing assists in making something like the GERS look normal.
Hi Dave Andrew. I make it two months :), so Independence Day is November 30th 2022 and Currency Day is the weekend of the 28/29th January 2023. See http://www.reservebank.scot. Other than some new notes and coins and an S in front of the £ the person in the street will notice almost no change. I don’t see any reason to pretend about carrying on with sterling. Everyone knows independent countries don’t use other people’s currencies so to say we will (like the No Growth Commission does) is simply to appear dishonest. In fact I already predict that the Brit Nat attack line will be ‘They are lying – they won’t use Sterling as the minute they get Indy you will wake up to find they just confiscated all your sterling and have given you some worthless new Groats instead that they just ran off on the photocopier.’ And if we are lying about currency we probably are about everything else too. It is going to be back to 2014 and us arguing the indefensible. We will use sterling, No you won’t, yes we will, no you won’t. Just as in 2014 there is no answer to that attack line. So the ONLY easily understood, economically sensible and safe, and policy that can not be attacked is our own currency asap.
Thanks Tim
Curiously, following the Union of Parliaments in 1707, in everyday life in Scotland both the pound-sterling and pound-Scots continued to operate in general use, especially in rural areas, for decades. References were also made to both currencies in the literature, when the topic was financial.
That lasted for about 100 years….
Dave Andrews says:
“To convince the voter yo vote YES & win Indy ref2
All talk of deficits has to be avoided most importantly sterling must be our currency.
Average voter will be scared of losing the pound. In the beginning at least £ must be the currency.”
I say bollox, Dave. If you want that we win independence you have to tell it like it is. You want to sneak under the wire with a load of horseshit the mainstream media will mince the whole process again. (A bit like they just did with an entirely affordable Labour manifesto in the recent UK GE.)
I agree
Go and be bold
Gers is clearly a biased and deliberately inaccurate construct designed to suppress Scottish aspirations for independence. Best way to project how an independent Scotland might perform is to compare our current living standards, pensions etc with those of similarly sized developed nations in Europe. Eire, Norway, Switzerland spring to mind and only one of these has equivalent natural resources to Scotland. That comparison shows we are well behind despite our natural advantages.
Unless the unionists have the gall to claim that the Scots are inferior in intellect and ability to the citizens of those countries there is every reason to suppose we can mirror their achievements post independence. Our apparent poor performance is a direct result of being controlled by a corrupt vampire state with the management skills of Bugs Bunny.
Strangely Richard’s views on GERS did not stand up to scrutiny in front of the Scottish Parliament: https://youtu.be/Ni5dTPBgLKE
Richard, is there a single economist, anywhere in the world, who agrees with you on this?
An honest approach would be for Richard to acknowledge the weaknesses of his own argument and defend them, not to proceed as if this is all terribly obvious and everyone else is an idiot or acting in bad faith.
Well, I have to disagree with you
As many others do
I think the claim you make is simply more Unionist nonsense
And, for the record, I have got rather used to being told I am wrong in almost everything I have done until it turns out I was right after all
I suspect very strongly that will be the case here.
Jean,
Regarding this: “Richard, is there a single economist, anywhere in the world, who agrees with you on this?”
Well, there would be the Modern Monetary Theory economists of which there are many and then there would the hundreds of other economists that have learnt to advocate for monetary sovereignty in the decades that have followed the publication of Robert Mundell’s Theory of Optimum Currency Areas in 1961.
Would that be enough?
Because there are plenty of others as well.
An excellent article,
BUT
With regard to currency, Joe Blogs is generally ignorant. He understands what a £ is. Because of this ignorance, he is golng to be highly suspicious of change. In general, he has little or no trust in politicians.
IMHO, the doubts that he has, have to be cleared up in a simply, easily understood, convincing manner.
Hi Sandy, you can refer folk to http://www.reservebank.scot. Should have most of the answers, hopefully. For the sake of argument I call the new currency the Scottish Pound, so S£ or in Gaelic that would be £A. For the person in the street they would see no change at all other than the S in front of the £ sign. The shop has to change nothing as all the labels on the shelves are the same, the till is the same, etc. You will have a slightly different design of notes and coins, a new debit card, and that is about it. Contracts where both parties (borrower and lender, etc) are Scottish will convert by law (e.g. a mortgage, rent, alimony), but anyone who wants to keep their money in sterling and their sterling credit card, etc can do so. The economics change fundamentally as the SG changes from a currency user to a currency issuer, but that is not something that the ordinary person will be aware of or indeed needs to be aware of. So long as we do adopt our own currency of course.
Dithering about with sterling for a decade or more has the appearance of being safe and keeping everything the same while the reality is that nothing is the same and to carry on with sterling would be to invite a catastrophe (no lender of last resort, SG in hock to the international financiers, currency crises every few months, etc).
Typo? English country council? I suppose that should be county?
Indeed
Richard, always interesting to read your analyses. One of the elements of GERS that always puzzles me is our (Scotland’s) share of oil revenues. Why is the total for the UK so much lower than Norway’s?
My belief is that Norway retains ownership of its oil reserves whereas the UK sold the oil rights to the production companies. Surely this cannot account completely for the vast difference in tax revenues between the two countries? It appears to me that UK oil revenues are not only miniscule but negative in some cases when tax relief for decommissioning costs is considered. The same oil companies that seem to pay so little to the UK are making profits of many billions of pounds on their worldwide operations. Is this purely because of Tory policy or is their a good fiscal reason for this? Is there any credible reason why an Independent Scotland should not have a more robust taxation policy that could make a massive difference to our balance sheet?
Norway invested its oil for t its future
The UK used it to subsidise unemployment in the 80s and 90s
And then in giving corporate bonanzas
Call it Tory policy if you wish
Will it make any difference in an independent Scotland? No. Oil is history now.
Richard / Tim, is it possible that the coupling of a new Scottish currency with rUK currency and letting things run might not be conducive to overall currency stability. Scottish Independence would surely cause upheaval and instability to an rUK currency due to withdrawal of a large part of the present rUK’s economy.
Why should a currency be coupled to sterling?
Coupled ? Is that different from ‘pegged’?
I’m not sure what coupled means, but launch will be initially at parity with Sterling and ‘pegged’ for a period at least, so the population can convert from Sterling to Scotpoonds.
That’s my understanding of the process. How long the pegging will hold is anybody’s guess. Maybe not very long and holding at parity against ‘market forces’ will be disastrous and pointless. The whole point of floating fiat currencies is that they float; as Major and Lamont discovered to our cost when we tried to join the ERM at a fancifully miscalculated exchange rate. I think Churchill suffered a similar embarrassment when he tried to put Sterling back onto the gold standard in 1925 at an unrealistic rate which had more to do with misplaced national pride in having a ‘strong pound’ than with economic practicalities.
It is not usually sensible to peg your currency. Certainly not to something like sterling, so we would not do that.
A very enlightening piece Richard, thank you.
Its strange indeed that the SNP have not only produced a paper such as this but have never as far as I know seriously challenged GERS when the subject comes up in interviews on tv and thus making the general public aware of its flawed data.
Their silence on the economics of an independent Scotland is indeed deafening.
alex armstrong says:
“Their silence on the economics of an independent Scotland is indeed deafening.”
It worries me. Party activists are frightened of the money issue because of the bruising the media gave the indy movement in 2014. A couple of well placed, loudly repeated and high profile lies about loss of pension entitlements and whether Scotland could or could not use the pound caused profound doubts.
The response is to want to ignore the issue and hope voters will have forgotten and will vote with their hearts for
a tartan liberty fantasy like a Scottish Brexit rather than their heads for self determination and some real chance of being able make it happen.
This currency issue is a huge hostage to fortune and will wreck the chances of a vote for Scottish independence as surely as not explaining economic realities to the electorate has just done such immense damage to the Labour Party and given Boris a free pass into Downing Street.
Big issues have to be cleared before election campaigns start or the media lies cannot be countered in the very few weeks that are available. The mainstream media is profoundly Conservative and Unionist and social media volunteer activists work with great energy to keep the propaganda machine rolling repeating every lie and slur.
Before the SNP were in Government (a long time ago now) the Scottish public, very conservative whatever their politics, looked sceptically on the SNP as a potential party of government. This was a function, in part in the optics of the Party’s history in Scotland. What they had to do was prove that they were managerially competent (at least by the loose standards of politics). In order to do so being in power meant managingin competently the “status quo ante”. Radicalism was either to be postponed or focused on the ‘peripheral’. The rules of engagement, the methodology of Government, the established procedures (including GERS) were a given. Once you have run this system for several years and accepted the rules of engagement, without protest (which was no doubt difficult to do in the first minority government) it is difficult suddenly to protest that you did not believe any of it.
At the same time the SNP has been led by ‘managerialists’ like John Swinney (I think an accountant); you may catch the drift. The SNP has real difficulty in understanding that managerialism is not enough; not least because the Scots remain conservative, whatever their politics. The professions also play a larger role in Scotland, I suspect than elsewhere; and they are often a subtle drag on reform.
Subtle drag?
Really?
I think ‘drag’ would do…
True, but my point is – nobody notices in Scotland. Nobody is supposed to notice.
A happy new year to you and yours when it comes, Richard.
Thanks John
And to you
Should Scotland proceed with sterlingisation, albeit with notes bearing £S or £A; don’t be surprised if the market determines an “exchange rate” impacting on gilts/bond sales.
The market can do what it likes
The reality is that Scotland can also do QE
And the truth is that high-quality debt is hard to come by – and Scotland will be issuing it
Debt is important, it comes with consequences; post independence:
1) What share of the UK debt could fairly be ascribed to Scotland?Â
2) What interest rate should Scotland pay to the treasury?Â
3) Over what time period would the Scottish government be required to repay all its debts to the rest of the UK?
Presumably a post independent Scotland would want to raise money via bonds/gilts (long term) and Treasury bills (short term). Investor confidence in debt repayment is important.
1) Probably nil based on the work of Brian Ashcroft.
2) If no debt is due why worry?
3) It has no obligation to ever repay that debt because the UK will never repay the dent either
A government that issues all its debt in its own currency can never default. This is why all Scottish debt has to always be denominated in Scottish currency
There can never be an issue of investor confidence in that case – unless the investor is ignorant of the facts
Dear Bruce Rossignol, the UK state debt is a hoary old chestnut. In International Law then the UK already declared in 2014 that it will be the ‘continuing state’, as in e.g. Russia when the USSR broke up. They will always do that as if there was no continuing state then the UN Security Council seat would be vacant and given to another country instead. In law the continuing state keeps the assets (reserves, embassies, military bases abroad, etc) AND the liabilities (bonds, pensions, etc). So there is no obligation on Scotland to take any share of the gilts. None of the other countries that left the empire ever have (and I know there was a quasi-exception around Ireland but that was actually money lent to tenant farmers before 1914 to buy out their landlords and which they repaid over 40 years or something where Ireland carried on collecting the money and giving it to the UK until 1938 when they unilaterally stopped paying and the UK then wrote off the balance). It is also the case in law that you cannot unilaterally take a bond issued by the UK to a lender and then change the issuer to another country. So it is simply not possible for Scotland to ‘take a share of the UK National Debt’. The most you could ever do would be to set up an entirely new bond between Scotland and rUK for paying an agreed sum over some time period. However I don’t see any reason why you would do that. The National Debt is also the UK National Savings and the whole lot belongs to rUK as the currency issuer.
Since we would not take any share of the rUK debts (or assets other than what is located in Scotland) then the interest rate isn’t relevant.
At the present time Scotland does not have any debts due to the UK treasury so your question does not arise. There is some local authority debt owed to the National Loans Board (or some such – name may be slightly different), but I would suggest the Scottish government takes that over by using a small part of the huge foreign reserves we will have to pay off HMG, switch the local authority debt into being denominated in S£ and owed to the Scottish Treasury instead.
The Scottish Government would issue bonds (I would suggest not to 100% of the deficit the SG should and can run in the early years as the rest can simply be an overdraft at the Scottish Reserve Bank) but these will be in S£. International lenders have exactly zero S£ available to lend to us so the only people the SG can borrow from is us (and our pension plans, etc). International money lenders and their interest demands, etc are totally irrelevant (as they more or less are for the UK as HMG only borrows in sterling – I say more or less as there is a lot of sterling around and it is widely distributed so foreigners do have sterling holdings they can lend).
The Scottish Government always has the money to repay S£ debts (as does every currency issuer). Besides there will be a big demand – there is currently no SG debt so there is nothing for our pension plans and so on to invest in. They will not want to have all their money tied up in UK gilts as that would be an exchange rate risk for them.
Spot on Tim
Thanks
I concur entirely with Dr Rideout, but simply out of over-developed pedantry, I should point out that there is a curious anomaly in UK-rUK acknowledging it is solely responsible for all the Debt in 2014. The UK is not a Federation; and it is no longer an Empire, and in any case Scotland is not a constituent part of the Empire but a formative Partner in the Union. The UK is, explicity and categogorically an “incorporating” Union. It is not possible for Scotland to leave the Union; it can only destroy it. The end of Union should be the end of Britain, the dissolution and liquidation of everything. there is the rub. Nobody can afford actually to face the reality of an incorporating Union. It can only be fudged; protect the debt and currency, and let Scotland secede from a non-Federal Union.
It is often said that Scotland only formed the Union in 1707 because it was bust, following the Darien disaster. Scotland was certainly broke, there was a credit famine; but critically – it had no debt. It was debt free in 1707.
England had to pay the “Equivalent” a large sum of money, paid partly in specie, carried up to Edinburgh in large chests (they still have some of the chests) to pay Scotland – to take its share of England’s debt. It is justice that Scotland will leave, as free of debt as it arrived; it has paid more than its share over 300 years in blood and treasure for a venture that has reached its natural termination.
Can I be pedantic as well?
I think the law Tim refers to – and England’s desire to be the continuing state will in practice resolve this concern.
Dr Rideout,
I was really making a point about the instrinsic nature of this Incorporating Union, and why it was an Incorporating Union, which was a quite deliberate, negotiated solution. It was deliberately constructed to make it difficult to unravel. I am thinking historically. I have reservations whether your chronology regarding Ireland affects the matter of the prior Union.
I do not disagree about your point regarding International Law (which would be lost on the 1707 Commissioners!), which is why I consigned my musing to idle pedantry; although it must be said, it has not been, and will not be, tested. The solution produced for rUK is a function of necessity; but as a resolution of an Incorporating Union, it remains an oddity.
Candidly, and I must ask you to forgive the brevity of my opinion; but I think you are quite wrong about Darien. I appreciate your concern regarding the “too poor” argument, and I understand you have very good reason for it, but it seems to me quite inappropriate to use that particular line of approach in historical context. I will not attempt a long discourse on the issue of Darien, but in ‘short form’, essentially I think you have fallen into the fallacy of ‘presentism’ in historiography.
Thanks John for your agreement.
I can probably be pedantic too (comes with being Aquarius!) 🙂 :). There are two unions, with Scotland and with Ireland (in 1801) so Scotland leaving does not end ‘The Union’ so long as NI is still there. On the money front sterling and the National Debt pre-date 1707 and were taken over from England. So they simply revert back to England.
I don’t think International Law is very bothered about how a state is composed. The UK is internationally definitely a state and if a state breaks up in any way then one part may opt to be the continuing state (generally with the agreement of the other parts). Whether the part that decided to be the continuing state had any previous definition as a nation or country is irrelevant. The law would apply just the same if it was London and the South East that was the continuing state.
I have also read that it was a bit of myth that Scotland was broke after Darien. Certainly some investors were. It still took the threat of designating Scots as Aliens and thus debarred from trading with England and the Colonies in, I think, 1704 to force the issue plus dollops of cash to the (aristocratic) members of the Scottish Parliament. I think talking about Darien is a bit of the too poor, too stupid argument.
I imagine Tim and John are aware of the following, but it bears repeating for others who may not be. There is no doubt that the Darien venture was badly organised and not prepared for the conditions they met, as documented here – http://www.bbc.co.uk/history/british/civil_war_revolution/scotland_darien_01.shtml
The venture was an attempt to recover from the fact that “The nation’s trade had been crippled by England’s continual wars against continental Europe”.
(remind you of anything)
The Scottish investors flocked to invest in Darien after English investors pulled out – “it was not just the Spanish who felt threatened by it. The English East India Company, fearing the loss of its monopoly on British trade to the Indies, successfully lobbied the English Parliament, which threatened the new company with impeachment, forcing its English investors to withdraw.”
The English Parliament was also responsible for the –
“constant threat of attack from the Spanish, with absolutely no support from the English colonies which had been ordered not to aid them”.
To cap it all – “The institution established to administer this money (the Equivalent) eventually became the Royal Bank of Scotland.” Whatever happened to them?
My selection of quotes *may* be biased, so read the BBC article for “balance”.