George Kerevan: We can still rise and be a triple-A nation again

Picture: Ian Rutherford
Picture: Ian Rutherford
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Far from being critical, Jim Leaviss is surprising positive about an independent Scotland’s fiscal robustness

I’VE just come back from enjoying New Year in Paris among the chattering classes. There the talk is of the perfidy of the ratings agencies, those mysterious, unelected Wall Street establishments that seem endowed with the power to determine the credit worthiness of great nations. My French friends see a plot against La République.

Back in Edinburgh, amid felled trees and hangovers, I discover that the same conversation is being had about the credit rating of an independent Scotland. Jim Leaviss, a well-known blogger on these matters, has pronounced that “a rating agency would not give Scotland a AAA rating” (which is what the UK has at the moment), and so an independent Scottish government would pay more to borrow.

Mr Leaviss has come in for ill-informed sniping by the fringes of the Nationalist community. But he is a long-time market analyst for M&G, the investment arm of the mighty Prudential Group, and so should not be dismissed lightly. That he lists his heroes as Brian Clough and Morrissey does not necessarily detract from his expertise on bond prices.

In fact, on reading Mr Leaviss (at bondvigilantes.com), it transpires he is remarkably positive about an independent Scotland’s fiscal robustness. He says that to be a triple-A rated economy, a state needs to have a debt/GDP ratio of 60 per cent or lower. According to Mr Leaviss, Scotland’s debt/GDP ratio (including North Sea oil) would be 56 per cent, which he deems “respectable”.

He goes on to calculate that if John Swinney, as independent Scotland’s finance boss, sold off the rights to future oil revenues today – which eliminates uncertainty over future price fluctuations – he could “wipe out Scotland’s national debts” and “even invest in a Sovereign Wealth Fund like the Norwegians with the change (£80 billion or so)!”

In fact, Mr Leaviss is angry that successive Westminster governments failed to invest the proceeds of North Sea oil. He said: “The UK government has taken £270bn out of the North Sea in tax revenues. Did we save it, like the Norwegian Statens pensjonsfond now worth around £330bn? Nope…we gave it away in a 20-year period to a population… [that] used it to buy avocado-coloured plastic bathroom suites, now doomed to eternity in landfill across the nation.”

Here is Mr Leaviss’s point: Scotland has a lower rate of economic growth than the UK, now and in the past. It is growth that determines a country’s prospects for servicing its sovereign debts. Low growth means a lower credit rating.

As a professional economist, I’ve been banging on about Scotland’s low growth rate for 30 years. Why our poor growth record, when we’ve had a higher graduate ratio than the UK average, plus North Sea oil? Because in the post-war era, Scotland has suffered from a permanent deflation – lack of demand – caused by the UK’s perennial high interest rates and high exchange rate.

These, in turn, are the result of a UK economy built around the needs of the City financial sector, which has sucked in capital, distorted rates of return and weakened manufacturing. The only way out of this impasse is to free the Scottish economy from the fiscal and monetary straitjacket of the City.

If fiscal and monetary freedom is used to set Scotland on the path to higher growth – think lower business taxes – Scotland’s credit rating will stabilise at a sound level. Well-managed, small industrial economies – even with big banking sectors – tend to have the highest credit worthiness. Norway has a triple-A credit status, as do Austria, Denmark, Finland, Sweden and Switzerland.

A key issue will be the currency. An independent Scotland is unlikely to consider joining the eurozone soon. Establishing a new currency from day one would create uncertainty. Which means Scotland is most likely to keep the link with sterling.

This does not mean Scotland would use existing Bank of England notes, though I expect these would still circulate freely north of the Border. Instead, the Scottish central bank would issue its own notes and the Scottish Government would guarantee an exchange rate with sterling at one to one. That would have the advantage of allowing the Scottish central bank to issue currency to guarantee public debt, which would ensure a strong credit rating.

How would exchange-rate parity be achieved? A rush of foreign investment into North Sea oil would tend to make the Scottish pound more expensive. In which case, the monetary authorities would print more Scots pounds to soak up demand, and pocket the foreign currency. Scotland would soon have large foreign currency reserves, which the ratings agencies would love.

What if rump-UK interest rates rose, threatening to suck capital out of Scotland? Ordinarily, Scotland would have to raise interest rates as well, in order to maintain currency parity. Surely that means Scotland would be no better off than at present, with London still calling the tune? Not necessarily.

The Scottish government could use fiscal policy – lower taxes – to offset higher interest rates, something it can’t do at present. As Holyrood would be free to borrow, it could run a deficit to maintain growth. Or, if it looked as if the ailing rump-UK economy was headed for permanently high inflation and interest rates, Scotland could choose to break the parity link with sterling, letting the pound sterling rise. Cheap Scottish exports would then flood England, and we could use the Scots pound to buy up companies south of the Border. That would only strengthen Scotland’s credit rating.

The big three ratings agencies have become more political, something an independent Scotland must be aware of. They are over-compensating for their unpardonable failure to predict the 2008 credit crunch. But the eurozone crisis is not the fault of the ratings agencies. It is the result of governments sacrificing sensible growth strategies for profligate borrowing (Greece) or insane property bubbles (Ireland).

On the contrary, an independent Scotland, with oil, low business taxes and the freedom to set its own economic course, will soon join the triple-A nations.