It is a pleasure to contribute to what has so far been a somewhat enlightening debate.
The starting point of my analysis in this debate, as a democratic socialist, is: what structures of governance are best situated to deliver maximum economic benefit to working people in delivering the highest-possible quality of life and public services and amenities to serve their interests? That underpins my thinking. When I think of the benefits of the Union, I think back to my own grandparents and my grandfather fighting with the Royal Artillery, making common cause with people from across the United Kingdom to defeat fascism in Europe.
That common cause transcended into the spirit of 1945 and that 1945 election, which delivered the first majority Labour Government, who fundamentally transformed this country, delivering the welfare state and the pillars that underpin modern civilisation in this country. That is why I never had any doubt about joining the Labour party at the age of 16. I knew that, although it might not have delivered only good, it had delivered everything that had been good in this country in the preceding 70 years. I had no doubt that every great societal achievement and all progress this country had achieved had been delivered by the solidarity of working people acting in the labour and trade union movement. I never had any doubt either that the United Kingdom served their interests when the British state was mobilised in their service. Indeed, when I look at Scotland today, I think of the benefits that we have achieved. If nothing else holds true, Scotland benefits every year from £9 billion that it would not otherwise have to invest in the provision of public services that ensure that quality of life for people in Scotland is better than it otherwise would be. That is equivalent to
£1,470 per person in Scotland every year. For as long as that figure is correct, there can be no socialist analysis for unpicking and destroying a Union that delivers that economic and social benefit for the people of Scotland.
The SNP’s analysis is so awry when it comes to dealing with that reality that it has run away from the idea of full fiscal autonomy because the transfer is undisputable. Looking at its latest analysis in the so-called growth commission report, we see that it tries to compare Scotland with other advanced economies. Speaking about the target of reducing the fiscal deficit in Scotland to under 3% of GDP within five to 10 years, Scottish Trends’ John McLaren says that
“it clearly involves a tighter fiscal strategy over this period than is likely for the rest of the UK. The Office for Budget Responsibility (OBR), currently expects the UK to have a deficit equivalent to 2.3% of GDP in 2021-22 and falling, which should allow for an easing in public expenditure settlements over time. Meanwhile Scotland will be moving from a deficit equivalent to nearly 6% of GDP towards a 3% target. It doesn’t take a mathematical genius to work out the implications.”
As long as those implications may threaten the interests of working people in Scotland, I am opposed to the notion of separation and am committed to the idea of the Union.
The growth commission assumes that an independent Scotland would achieve a GDP per capita growth rate that is 0.7% greater than it would be if it remained in the UK. However, the justification for that figure is extremely tenuous, relying on territories or countries such as Hong Kong and Singapore in the comparison set, despite explicitly rejecting their low-tax, high-income-inequality economic models. Remove Hong Kong and Singapore from the comparable countries growth rate analysis and 0.7% becomes 0.26%. If that were the case, instead of the 25 years that the growth commission assumes that it would take to generate £9 billion of revenue to close the gap with the UK, it would take 67 years. However, £9 billion is of course less than the £10.3 billion effective fiscal transfer that Scotland received from the rest of the UK in 2016-17, which we would of course lose on day one of independence. To test that assumption further, if we look back at the independence White Paper, the equivalent figure used then was in fact only 0.12% per annum. On that basis, it would take over 140 years to close the gap with the UK. Why on earth would anyone vote for that?
If we look at the performance of the three countries that the growth commission explicitly cites as being those they seek to learn in particular from—Denmark, Finland and New Zealand—then, using the growth commission’s own data source, the superior growth rate becomes an immaterial 0.06%. It is becoming apparent that the comparisons are utterly fanciful. On that basis it would take nearly 300 years to close the gap with the UK—the entire length of time that the United Kingdom has existed—which is utterly absurd and demonstrates that the growth commission is bereft of any intellectual rigour.
Then there is the albatross of the currency. In designing a currency regime or mechanism for an independent country, it is critical that the regime offers the country a credible means of adjusting disequilibria—deficits and surpluses—on its balance of payments. If it does not, it is doomed to fail in the absence of a risk-sharing agreement or transfer mechanism, and we have seen
that play out in Europe when Greece and Ireland suffered heavy internal devaluations and mega-austerity. That is an important lesson in the economic history of currency regimes. In thinking about the appropriate currency regime for an independent Scotland, it is crucial to have the adjustment question at the back of our mind at all times.
If Scotland were to become an independent country, it would become a net exporter of hydrocarbons. It is well known in currency economics that the crucial role of oil price changes in affecting the competitiveness of the non-oil sector must be addressed in designing a currency regime for a country with a diversified non-oil export sector and an oil sector. Otherwise, the non-oil sector gets crowded out, which has implications for jobs, output and the sustainability of the balance of payments and interest rates. It is the classic Dutch disease phenomenon. However, all the literature on the currency issue that has been generated since the referendum, including the Scottish Government’s growth commission report, does not even address that particular issue.
Regardless of the currency regime that an independent Scotland might choose, it would need a market-credible pool of foreign exchange reserves to run a currency regime. From the evidence of similar sized economies, that would amount to £40 billion, which is around one third of Scotland’s annual GDP and not a sum of money that a newly separate Scotland could borrow on international financial markets. The only way that such an amount could be accumulated is through running budgetary surpluses for a number of years, but an austerity programme would need to be run in any case in order to establish the “hard currency” effect, so the reserve accumulation issue can be seen as reinforcing that effect.
The growth commission’s alternative to the 2014 White Paper’s formal currency union would be to adopt the pound, much as Panama adopts the dollar, Montenegro adopts the euro and so on. That is a currency substitution system, but such a system is viewed as inherently unstable by economists because it is subject to the whims of individuals’ expectations and the effects that these can have on demand for money, which can lead to changes in supply through the balance of payments. There would be no effective control over the money supply in Scotland and no lender of last resort function because changes in the current account of the balance of payments would directly affect the money supply in the Scottish economy. For example, a surplus on the current balance would increase the quantity of sterling in the economy, which would have inflationary implications. Conversely, a current account deficit would draw money out of the economy with deflationary implications.
To deal with such flows, a separate monetary authority would need to be set up to smooth those effects, but the evidence from similar-sized economies to Scotland, such as the Nordic countries, is that foreign exchange reserves of upwards of £40 billion are needed to achieve that. If the monetary authority were prepared to offer deposit insurance of £120 billion of retail deposit accounts in Scotland, it would need to accumulate foreign exchange reserves of £160 billion, which is greater than the entire Scottish GDP. Those are extraordinary figures.
Where would the money come from, given that the balance of payments of an independent Scotland would have a deficit of between 2% to 5% of GDP? It would
need in the region of £6 billion to £7 billion just to cover those international obligations. The only way those sums could be achieved would be through a massive austerity programme. For context, the Scottish NHS budget every year is just £13 billion. We can wipe that out right away. The proposal is simply not a sustainable proposition that anyone of a socialist background could endorse.
All the points I have made focus purely on the monetary implications, but let us look at the competitiveness of the non-oil export sector with the effect of the oil price changes. That would massively impact on the competitiveness of the Scottish economy, entailing mass industrial closures of a scale we saw through the 1980s. Indeed, any alternative, such as a form of sterlingisation with a currency board, would need the currency to be backed 100% by foreign exchange reserves, which again is an unsustainable position. Such systems require considerable amounts of foreign exchange—both cash and reserves—to back deposit accounts. The Hong Kong experience shows that £200 billion of reserves are required to run a currency board. Those massive sums of money in turn require policies of fiscal austerity, balance of payments surpluses and no lender of last resort function. Again, the loss of competitiveness issue would not be addressed in that set-up. It is simply not viable as a currency option unless the Scottish Government are intent on handing over large sums of Scottish taxpayers’ money to hedge funds and speculators.
Interrogating the Scottish growth commission’s proposals demonstrates that they cannot offer a socialist solution to separation. That is why the growth commission has achieved only one thing: it has demonstrated that the huge benefits we derive from being part of the fiscal, monetary and political union are as relevant and integral to quality of life in Scotland today as they have ever have been. That is why we continue to argue as the socialist Labour party that we must marshal the forces of the British state to deliver the best quality of outcomes for the people of Scotland by utilising its fiscal and monetary powers to deliver world-class public services for the people of Scotland. We stand by that commitment today, as we did in 1945 when this party built the national health service and the welfare state.
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