Brian Ashcroft: Debate on economics is only just starting
A sterling union idea creates more questions than answers. Picture: PA
Alex Salmond’s idea of a sterling union is one route for an independent Scotland to go economically but it poses more questions than it provides answers, writes Brian Ashcroft
IT IS good to see George Kerevan bearing up well under fire with his good-humoured article (Scotsman, 3 February) responding to recent criticisms of his views on the Scottish economy post-independence by John McLaren and myself. He concludes that what we “are contesting is not the economics of independence but of the transition to independence – an admittedly complex period. In doing so, they ignore – deliberately? – the policy mix that could transform the Scottish economy permanently”.
Nothing could be further from the truth.
Indeed, as Alf Young notes (Scotsman, 4 February), “already we are into the meat of the issue. What independence might look like. What key ends it would pursue”.
The future of the Scottish economy post-independence depends crucially on the choice of currency, the costs of government borrowing, the stability of oil revenues and other dimensions of the “policy mix”.
The debate so far, including the contributions from outside Scotland by the National Institute for Economic and Social Research and John Kay, a former member of the Scottish Government’s Council of Economic Advisers, has produced, in my view, several clear conclusions.
First, on monetary matters, the view attributed to the Scottish Government that the Bank of England (BoE) would become the central bank for the sterling monetary union as a whole is difficult to defend. A simple but critical point is that, after independence, there would be two jurisdictions but only one currency, if Scotland adopted sterling.
The rest-of-UK (rUK) government would not want rUK to have the current status of France to the European Central Bank because this would effectively mean that both Scotland and rUK would be borrowing in a “foreign” currency while the BoE, as now the central bank for the new Scotland-rUK union, not the rUK, would be issuing the currency. In such circumstances – one central bank but more than one government – the risk of default on borrowing is perceived by the financial markets to be greater and hence the premium on rUK Treasuries would be higher than at present.
Currently, the ultimate guarantor of the BoE is the UK taxpayer. In the event of Scottish independence, it will become the rUK taxpayer alone. So, in monetary matters, Scotland would not be equal to rUK. The BoE would essentially be the rUK’s central bank, one jurisdiction, one bank, but potentially performing some necessary financial and monetary stability functions for the wider sterling union. There would be a common interest rate across the sterling union.
The BoE would, I believe, be likely to act as “lender of last resort” to all banks in the monetary union, including Scottish banks, but would do so at “penal” or above market rates. The Scottish Government would be issuing its own bonds but in sterling. It would effectively be borrowing in a foreign currency and would have no ability to print money. Accordingly, markets are likely to demand a higher yield premium on Scottish bonds than rUK Treasuries and present UK Treasuries.
And then there is Alex Salmond’s view that a British chancellor would be “biting our hands off” for an independent Scotland to keep the pound. Is that fair comment? It is true that the contribution of oil and whisky exports is favourable to the UK balance of payments and to UK tax revenues. Sterling probably trades at a higher rate because of this. However, if, after independence, the UK government was not receiving the tax revenue from the income earned by these exports it might baulk at the penalty paid by UK exports through the loss of competitiveness due to the higher exchange rate. Accordingly, while the UK government might reasonably wish to hang on to the tax revenues, and keep Scotland within the UK political union, without the tax receipts why would it want an overvalued pound?
Turning to fiscal policy, if Scotland was to keep the pound, the BoE and the rUK government would require the Scottish Government to observe an agreed set of fiscal rules which would probably limit the scale of borrowing, the size of the primary budget deficit in relation to Scottish GDP and the level of Scottish Government debt to GDP. The requirement that Scotland adopt certain fiscal rules is the “price” that Scotland would have to pay for the BoE continuing to be lender of last resort to Scottish banks and enjoying the benefits of a stable currency. The BoE and the rUK government would desire Scotland to adhere to the fiscal restrictions. All of that could de-stabilise sterling.
Of course there would be the risk that the Scottish Government might not observe these rules. The risk for an independent Scotland inside sterling is that it would be able to issue its own bonds, like eurozone members, but it would be unable to print or change the exchange value of its currency. Again the result for Scotland would be that its sterling denominated bonds would trade at a premium to present UK Treasuries.
Third, the volatility of oil revenues, given their size in relation to the total budget, would make it difficult for expenditure planning by a post-independence Scottish Government. Kerevan’s imaginative covered bond and oil fund solution (Scotsman, 27 January) would not adequately deal with the revenue volatility issue.
On the positive side, Scotland would be able to run a more independent fiscal policy. Indeed, in an independent Scotland within a sterling union, it would only have fiscal policy. Within the UK’s monetary union, there would be no exchange rate adjustment to mitigate real effects on the economy. Scotland would have to conduct its fiscal policy within the broad fiscal framework set by the BoE and the rUK government.
In the event of domestically generated inflation and deteriorating competitiveness, the Scottish economy, currently, has to rely on ex post policy responses such as Scottish industrial policy and UK regional policy. The Scottish economy also benefits significantly from the risk-pooling arrangement with rest of the UK, which has facilitated bank bail-outs and ensures social security payments flow to the disadvantage and unemployed. There is no separate Scottish fiscal policy to prevent Scottish inflation from taking off, or cyclical unemployment from emerging, although this would become possible in a devo-plus world.
In an independent Scotland, we do not know whether productivity growth and competitiveness would be worse or better than under present arrangements. What we can say is that UK regional policy and risk pooling would not be available to help the Scottish economy adjust and grow. Under independence, Scotland’s ability to adopt radical fiscal policies is likely to be restricted and, in any event, most of the options might be available under devo-plus. The key question is whether such benefits more than outweigh the costs.
In conclusion, the “policy mix” post-independence will require clarity on both monetary arrangements as well as possible fiscal options. There is a need for further debate.
• Brian Ashcroft is Emeritus Professor of Economics at the University of Strathclyde
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Comments
There are 25 comments to this article
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christelijk_recht
Friday, February 10, 2012 at 12:26 AM#8 - So, in fact though he claims he is not now, Mr Ashcroft admits that he was once, a card-carrying member of the Labour Party. Did it not occur to him that this might be information that required disclosure? That he is the spouse of the former leader on the Labour Parliamentary Party in Holyrood, did not strike him as an interest that need be declared? .......................................................................................................................... This article is presented as the testimony of a largely unbiased if not neutral expert in the field. Readers will consider the veracity of Mr Ashcroft's statements and arguments based partly on that assumption. I put it to him that in the presentation of this article he is flying under false colors and that WILL serve to mislead readers assessing his thesis. The most charitable thing one could say is that in this respect, he has been exceedingly economical with the truth. .......................................................................................................................... Let us be clear here; Mr Ashcroft is burdened by of a sin of omission, in that he withheld extremely pertinent information necessary for an accurate appraisal of his article. There are no two ways about that. No amount of huffing and puffing about "nationalist trolls" will change that. It is not a smear, it is a statement of undeniable fact. ................................................................................................................... Can I say to him directly: would it not behove you to consider your own conduct in this matter, and to resolve never to repeat it, than to waste energy and time hurling invective at those who have exposed your transgressions?
makemineayesplease
Thursday, February 9, 2012 at 06:23 PMThe union and unionists continue to tell us seperation will bring disaster. If I hear any positive or progressive ideas on the forward for the union then I'd maybe consider going the other way, but the truth is all we're getting is negativity about scotlands future when that of the union is 'laden with gold' laden with debt and prejuduce! Why should we ignore our neediest in the quest to throw £100bn at a trident replacement? Its proposterous! Don't give me it! Ill defend salmond because I believe he is doing a good job considering westminster restraints. And if independence means we can look after our needy, not our lazy, and we rid ourselves of the scar of nuclear arsenal then I welcome it with open arms! If I hear positives about the union rather than negativity of scotland, then ill listen! Though perhaps to deter themselves into oblivion in scotland the other parties should prepare a blue print of how they intend to better our society and economy. I don't see it to be forthcoming though!
amicus alba
Thursday, February 9, 2012 at 05:30 PM22.Your adjectives and invective you use to describe the union (which is common amongst Salmondites) are pretty zero sum game like. Where will you live ( or even how) if Scotland stays within the Union. Surely it would be intolerable?
makemineayesplease
Thursday, February 9, 2012 at 02:14 PMI've voted for labour since I was 18. Where has that got us? Debt debt debt! In scotland we actually have an alternative to tories or liebour. I'm not an snp supporter as such, but I gave them a chance at the last holyrood election. And am I glad I did! Nor am I a rabid supporter of salmond, however he presents us with an option of self determination, rather than "our way or the highway" all I did was point out his record in government, now I know the concept of 'competent government' is something alien to unionists, but that's not my problem! I'm not gonna get dragged into the how's and what's of the whole thing. The SNP as the only party championing this democeratic choice to me (which incidentally is one I have since a young age been in favour of) of something different, have said a blue print for an independent scotland will be published in November 2013, until then its hearsay and conjecture To say this makes me sound stupid, because I have an opinion different from that of vile unionists is small minded and perhaps could be viewed as a 'toys out the pram' momment as ur outdated, vile, unfit for purpose union faces certain defeat
amicus alba
Thursday, February 9, 2012 at 10:39 AMSo there you have it. All economic analysis by Prof. Brian Ashcroft is null and void as he is clearly biased and is not a member of Team SNP. All economic analysis by Prof. John Kay ( whilst being an economic advisor to the SNP) is stone clad and correct. Once he left he was clearly biased and his hypothesis is no longer valid. =================================================== The truth and light can only be found in Salmondism which does not try to interpret potential economic impacts of separation vis a vis 'independence' but faith. Drop rationality and leap into to the promised land. Nats here yet again attack the man and not the ball. =================================================== 12. Etc- makemineayesplease - "I'm not an SNP supporter". Have you read your posts!!!! You are up there as one of the most rabid supporters of the SNP and independence bluffing how you used to support other parties. Please - do not lie to yourself it makes you look foolish. However I guess that is what Salmondism requires.
Kennedy Clan
Thursday, February 9, 2012 at 01:08 AM#8 I can sympathise with Professor Ashcroft - up to a point. He appears unaware of the irony of his special pleading given that the two witnesses he calls in aid in his article - John McLaren and Alf Young - also have close links with the Labour establishment. Last year, Joan McAlpine did an excellent expose "Time for some academic transparency?" of seemingly objective economists with strong Labour links. After this piece appeared, the CPPR became notorious during the 2011 election for the poor quality of its analysis and its failure to respond to justified criticism. The fact that two thirds of the team working on the analysis were previously employed by the Labour-led Scottish Executive apparently didn't cause any internal doubts about the credibility of their findings. It is that lack of self-awareness that suggests Professor Ashcroft may indeed be fooling himself into believing that he does not act and write in a partisan way.
onthebutton14
Wednesday, February 8, 2012 at 10:51 PMTo the obvious SNP zealots who, no surprise, stoop to uncalled-for small-minded personal nastiness rather debate the facts of the article... is that your limt? pathetic.
whitstomatowiu
Wednesday, February 8, 2012 at 04:26 PMComment removed by moderator
makemineayesplease
Wednesday, February 8, 2012 at 03:31 PMYes perhaps he is, and that's no doubt part of his tactics in the campaign, as I say I'm no snp expert or avid supporter but let's look at his record as FM. Our NHS isn't being ripped apart, our pensioners can travel free of charge, our parents children and ourselves benefit from free prescription and free NHS eye tests. And our children if they study at home can do so free of the burden of excessive student debt. I think with this in mind added with budget surplus without access to the revenue from our natural abundance of resources, both oil and gas, without even considering that we'll have the capacity with independence to provide green energy for 14 of europe. Any currency union would have to be run from one central bank, each eurozone country doesn't have its own central bank, does it? Economically an independent Scotland should, as the unionists say be an absolute calamity! I feel the pound will plummet, as will the much discussed AAA credit rating with out these assets which are geographically those of the Scottish people which the presence of is all that's preventing a UK credit downgrade, with this I believe (if they don't want us to use the pound) either join the euro or create our own currency, a currency which I'd bet my mortgage and company on being more valuable than the pound ran from our own Scottish Central Bank
Badgersarse
Wednesday, February 8, 2012 at 02:14 PM"Debate on economics is only just starting" Indeed ... and this will include the economics of the Union ... past AND present :-)
Publius
Wednesday, February 8, 2012 at 01:51 PM#14 (1) It is not UK government that is picking quarrels with Salmond. Salmond is picking quarrels with UK. Whether we become independent or not the UK government will not be well disposed towards a Scotland led by Salmond and the SNP. (2) It is very easy to use the currency of another state, but that is not the same as sharing a central bank. Ashcroft may even be over-optimistic in arguing that the BofE would be the Scottish government's lender of last resort.
makemineayesplease
Wednesday, February 8, 2012 at 12:15 PMPublius A majority elected administration in scotland, a failing coalition in london. The scottish people voted to award a majority to the SNP and if u believe that london shouldn't listen to scotlands government then you have no grasp of the concept of democracy! And the unionists are comparing Salmond with a dictator? And how can we use sterling without the sterling central bank, ie the BoE. Vote YES
frank mcbride
Wednesday, February 8, 2012 at 12:06 PM#8, Brian, I feel your justified anger at some of the comments has clouded your rational judgment....................IMHO, most of our rather stange commentators are, most certainly, not members of the SNP.........................This is clearly evident from their apparent lack of knowledge of SNP policy and of wider Scottish politics and political commentators................Unfortunately, the Johnson Group seems to view puerile and ad hominem attacks as permissible and, as such, allows these strange people to make both offensive and unsustainable attacks on any peron of their choosing...........................If this important issue is to be addressed properly, then the Scottish Media has a responsibility to restrain commentators who are clearly intent on nothing other than defamation.
makemineayesplease
Wednesday, February 8, 2012 at 12:05 PMNationalist trolls? As I've stated in another story, I'm not a member of the snp nor am I an snp supporter. I'd normally vote for labour however have become completely disillusioned by who this shambles of a party are and what they stand for. Lies and more lies in my opinion. Bring forward the SNP, democratic majority in a parliament set up by labour never be able to have a majority (another example of labours glowing record?), not rolling over to london and doing as they say. No one voted for this government in london, and perhaps they should do well remember this when tackling the major issue of talking up this outdated, unfair and shambles of a 'union'! Perhaps what we would like from professor ashcroft is an explanation that if scotland (under SNP) returns a surplus to the treasury, and we have free universities, our elderly enjoy free bus travel and prescriptions are free. These frontline services are to be enjoyed and are protected by the snp, there's also a council tax freeze.........and still a small surplus, without fair access to OUR assets (north sea). You can say what you want about the SNP but they are out performing every other administration in the 'UK'. If in 2014 I'm to vote no, then I need to hear something a lot more convincing than this! VOTE YES
The West Awake
Wednesday, February 8, 2012 at 11:55 AM8 - I agree with the emphasis of your comments, however it is not untoward for us to expect to be informed that you are married to a one-time leader of Labour in Scotland and that you have had a long association with them albeit not an active one now. I would expect the same from an SNP leaning economist. Perhaps if this newspaper made a decent attempt at fairness and objectivity, instead of a relentless, nonsensicle, dreary and depressing tirade against the legitimate objective of Scottish independence, supporters may feel better inclined to be more positive toward it's contributors. Having said that, I have noticed a small recent increase in content not totally anti-independence. I hope this continues to the point where we can all take The Scotsman seriously.
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