Both sides agree the economy is the key issue in the independence referendum. How will independence or sticking with the Union impact on salaries, pensions and jobs? Few are better placed to answer these questions than Professor Andrew Goudie.
How much freedom does a modern economy have to fully determine its own economic policies? How much freedom would a Scotland with a new constitutional settlement have to determine its own policies ? Where, in reality, would the constraints impact most importantly on our self-determination ? What value would these constrained powers have in securing our objectives ?
In the modern global economy, constraints flow from the familiar interdependencies that now characterise global economic activity and globalisation.
They equally flow from the positive choices of nations to join global economic institutions, for example the World Trade Organisation and International Monetary Fund. But, more immediately, they flow from the specific choice of currency and of our economic partners.
Were Scotland to choose constitutional independence, the choice of currency system is broadly agreed to be the most critical choice in the hierarchy of choices. The future economic system is immediately shaped to a considerable extent by this single choice.
For a currency policy that entails monetary union with either the redefined United Kingdom or the eurozone, this choice carries immediate implications. For example, at the macro-economic level, monetary policy is no longer self-determined, and many argue that aggregate fiscal policy will increasingly be subject to collectively-determined constraint. Moreover, at the micro-economic level, the Union’s strategic approach, for example, to tax policy – and tax harmonisation, in particular – may limit the policy choices around any speciﬁc tax.
Constraints of this type would be a direct consequence of the collective decision-making of the political union, requiring member-states to pursue certain objectives and, therefore, adhere to certain policy goals both in return for receiving – and as a safeguard against undermining – the beneﬁts of union membership. How severe and how binding these would be on the preferred policy stance of any potential entrant to the union is the key question.
The critical point is that political and economic self-determination are necessarily and unavoidably constrained concepts. Once the primary and initial choice is determined – or negotiated, if such is necessary – and self-determination has been exercised with respect to this one choice, then the subsequent and less important choices relating to the vast array of other policy areas are substantively restricted. In many of these areas of policy, choices may no longer exist.
In the case of an independent Scotland preferring formal membership of a sterling monetary union, we need to understand what would be the redefined UK’s interest and what would be the Scottish interest. Why would an independent Scotland want a formal agreement? And, most importantly, as regards the degree of constraint incorporated within such an agreement, what would be the most that an independent Scotland would accept before it judged the benefits of the monetary union to be outweighed by these constraints?
And what would be the minimum degree of assurance that the UK would accept to sign a formal agreement? And in return for what? And what would be the alternative option for the UK ?
The UK would have a very direct interest in preserving the integrity of its own macro-economic policy and, specifically, in securing its medium-term policy objectives. Within a sterling monetary union, the Scottish economy would not be insignificant and its capacity in theory to destabilise UK macro-economic policy cannot be dismissed.
But this is not a one-way street. Importantly, therefore, over the longer term – which should equally be our focus of interest, rather than the current preoccupation with the immediate policy challenges – there need to be safeguards that protect the smaller partners in any monetary union.
What is probable is that any UK government is likely to seek an agreement that sets limitations on the ﬁscal aggregates – and the associated ﬁscal deﬁcit and debt ﬁnancing – to protect its macro-economic policy and safeguard it from adverse market reactions.
Within this picture, the role of the Bank of England within a sterling monetary union would seem to be one of the most critical elements to be understood were constitutional independence to be adopted.
Foremost are important questions relating to its legal status, its governance and its potential role in support of Scottish Governments and Scottish financial companies – both those of strategic importance to the redefined UK and those that are not.
An independent Scotland may see major beneﬁt in securing these continuing services from the Bank of England. But, if it did and were, therefore, motivated to ﬁnalise such an agreement, the UK would be powerfully positioned to secure the conditionality that it deemed desirable for the stability of its macro-economic objectives, a desire only reinforced by the recent experience of the eurozone. Indeed, it is not difﬁcult to envisage a UK government seeking an agreement in which wider economic and ﬁnancial conditionality is determined.
From the perspective of micro-economic policy, while an independent Scotland would notionally have full powers over taxation policy, what degree of freedom would there be to exercise those powers?
Many have argued that the redefined UK government would have a key self-interest in preserving the stability and sustainability – and indeed prosperity – of the Scottish economy within a sterling zone, and, given the degree of integration of the two economies, this must be correct.
However, the redeﬁned UK would equally have a major interest in preserving its competitiveness. It would, therefore, seem highly probable that the UK would seek an agreement that incorporated signiﬁcant safeguards for the UK economy. While it is unlikely that the redefined UK would seek tax harmonisation throughout a sterling monetary union, it seems improbable that beggar-thy-neighbour tax competition would be accepted on any substantive scale.
Indeed, with the proposals for both relatively modest and more radical extensions of ﬁscal autonomy within the existing United Kingdom, such as devo-plus and devo-max, the constraints on the use of additional Scottish powers might be expected to be similarly signiﬁcant, not least in areas of potential tax competition. In principle, these proposals seem to suggest that there would be unrestricted borrowing powers and autonomy over a wider range of fiscal powers. However, it remains to be seen what degree and what quality of autonomy, in reality, the UK government would grant in the detailed conduct of micro-economic policy by a Scottish Government. Only through the conclusion of a UK-Scotland agreement would the nature of any such constraints be clariﬁed.
The striking conclusion from this illustrative framework is that, under most proposed constitutional arrangements, there are many policy areas in which the value of the economic powers is indeterminate at this time. It is probable that, to some degree, policy would be subject to constraint, thereby impacting on the choice of macro-economic framework.
The degree of that constraint is, however, simply unknown at this time and would only emerge as an outcome of critical negotiation. Some observers would no doubt contest the existence of constraint at all in some areas of policy; others may see the constraints as both real and prohibitive in de facto removing the value of the economic power.
So, what constraints in reality would an independent Scotland face? Would the constraints embedded within a formal agreement for a sterling monetary union with the redefined UK (or, indeed, with the European Union were Scotland to go this way in due course) be politically acceptable or outweigh the benefits that a monetary union might bring?
There’s little point in suggesting we know all the answers now. We don’t. We will need to live with this uncertainty for some time until any real negotiations are concluded. But we do need to understand what these policy configurations might look like and how they might operate. In the end, it’s their capacity to deliver the outcomes that we seek that should be the heart of the debate.
• Andrew Goudie was chief economic adviser to the Scottish Government over the past decade and now an adviser to the principal at the University of Strathclyde. He has edited Scotland’s Future, a new book that sets out the facts in an impartial manner so people can ask the right questions and make their decision based on the clearest information possible. The Scotsman is delighted to join with the university in providing a series of edited extracts, written by some of Scotland’s and the UK’s most respected public servants and economists.
• Scotland’s Future is published on 26 March, priced £16.99. Available from www.dundee.ac.uk/dup