For a document that runs to over 660 pages, Scotland’s Future leaves many of the key economic and financial issues unanswered or, at best, half-answered.
There is no lack of vision or of proposals for enhancing public services and Scottish society over future generations. However it is asserted that these gains will be achieved as a result of an independent Scotland obtaining much greater control overthe main levers of economic and financial policy: monetary policy; the policies and institutions to deliver financial stability; and public finances. In the first two, as the document itself makes clear, control in these matters will be shared with the remaining Government and institutions of the UK. It is a matter of commonsense that, the more you share, the greater the limits on your freedom of action. This is not a case of playing with words or a debating point. As the experience of the Eurozone amply demonstrates, leaving any significant degree of control over the principal levers of economic and financial policy with an individual country which shares a common currency does not work. Sooner or later serious tensions arise which frustrate the ambitions of the countries involved to follow their separate paths to development.
There are also serious questions about each of the proposals for avoiding or dealing with these tensions. A single currency means a single monetary policy, with one short-term interest rate set by the Bank of England for the new Sterling area. Scotland’s Future suggests that the interests of an independent Scotland would be guaranteed by a new formal agreement which would alter the decision-making bodyby including members representing Scotland, appointed by the Scottish Government and accountable to the Scottish Parliament. How differences of view between the representatives of the two countries might be resolved, given their likely relative numbers, is not explained. Again, this is not an abstract or imagined issue. As the Scottish Government sought to follow its “different” and “ better” path of economic development, it seems certain that over time the views of its representatives regarding the appropriate path of interest rates would not agree with those of the other UK members; and interest rates would be unsuitable for Scottish businesses and consumers. This would place these representatives in an impossible position in front of the Scottish Parliament.
Similar questions arise in respect of the proposed arrangements for supervising financial institutions. Indeed, there is even less clarity, with two separate models suggested, neither of which answers the question of what is to be done when the interests of the two countries differ. Suggesting that the response to the inevitable problems that would arise in supervising banks from what would be a foreign countryby the application of “coordinated” and “consistent” standards fails to capture the reality of life in these circumstances. If, for example, the supervisors decided that the activities of a Scottish bank which played an important role in the Edinburgh Government’s growth plans should be restricted, and the members of the proposed Scottish Monetary Institute disagreed, whose view would prevail? Would the supervisor ignore the threat to depositors that prompted their action?
It is possible, but by no means certain, that banks which in the past have been deemed too important to fail because of their role in the financial system will no longer be bailed out with public money. If so, they will be closed down or sold to another buyer, if one can be found. But, once again, things are not always so clear at the moment when the decision has to be taken. The numbers are uncertain, can change frequently and the impact on the financial system at home and abroad far from clear. A single authority charged with responsibility for taking the difficult decision and acting decisively and promptly is absolutely essential. Real problems could arise if a major Scottish bank were to report that serious difficulties had unexpectedly emerged and the views of the two Governments on what should be done diverged. Delay in these circumstances can multiply the cost to public funds, as well as spreading the crisis.
If a rescue did have to be mounted, who pays? Even if there was agreement that the bank was too important to be allowed to fail, would the remaining UK Government be ready to step in with a contribution if the reason for the rescue was not on systemic grounds? Could Scotland’s taxpayers carry the cost by themselves given the still disproportionate size of the major Scottish banks? It is misleading to comment that the resolution of failed banks operating across national borders is now being dealt with at an international level, as Scotland’s Future does. The example given –theliquidity support provided to RBS by the Federal Reserve at the height of the crisis in 2008 – was strictly temporary and the cost of the rescue of RBS was met in full by the UK taxpayer.
In the area of public finance the questions are of a different kind, but no less troubling. Scotland’s Future contains much detail about the record of Scotland’s financial performance in the past, and gives projections about future revenues and spending plans. But there is no attempt to reconcile these projections with the recent findings of the report of the Institute of Fiscal Studies over the years ahead. Thislacuna has to be put alongside the claim that an independent Scotland will enjoy the “ top” rating for its public debt, a claim that is frankly fanciful. Past performance within an economic union with a strong credit history is no guide to a new country without aproven record of prudent fiscal behaviour as a sovereign state, and with the size and structure of Scotland’s inherited public debt yet to be settled.
Moving from the macro-economic to the micro-economic level, and assuming that the constraints of a single currency did not effectively block the ambitions to follow a different path to a higher rate of economic growth, where would the drive to generate that growth come from? There is no reference to changing the balance of the public and private sectors to suggest a new transformative change. The itemised changes in taxation seem quite insufficient to bring about more than a marginal shift in corporate behaviour. It is possible that the very act of becoming a separate country would create a surge in productivity which would attract foreign direct investment. This ismentioned in the document and is not to be dismissed, but it cannot be relied upon. Harder evidence of how that might happen is needed.
Scotland’s Future is a weighty document, packed with data and detail. It cannot be faulted on the grounds of lacking in ambition. However it is vague where it needs to be precise and unconvincing in too many areas where it needs to be persuasive. It is not enough to state that many of the issues which leave the reader unsatisfied will be dealt with in the negotiations that would follow a positive vote for independence. Scottish voters should know much more about what they are being asked to sign up to, particularly as they will be committing their futures not just until the next election, but for generations to come.
• Brian Quinn is a former deputy governor of the Bank of England. A longer version of this article will appear on the website of the David Hume Institute